Right, I'm going to cheat for this one... because I've already outlined my investment thesis on TMF here: http://boards.fool.co.uk/trinity-tni-half-year-results-12334968.aspx?sort=whole#12340100
So I'll predominately just copy-and-paste what I said there...
Quick Summary
TNI is a newspaper stock that is priced to roll over and die - it's on a P/E of 2. I, however, a) do not believe newspapers are in structural decline and have their niche, b) think the company's balance sheet is misunderstood and in a lot better shape than it initially appears and c) think a lot more of the company's problems are cyclical than structural. The loss of a major competitor through the News International saga can only help too - the Mirror appears to be the main beneficiary of its readers.
Longer analysis
First of all, balance sheet analysis:
I'm only interested in tangible assets so I discount all the tangible/goodwill/investment assets (arguably the investments have value but they are small so I'm ignoring for the sake of simplicity) which leaves us with:
£+399.4m PP&E
£-111.2m Net Current Assets (which includes some debt repayable very soon, in October 2011)
£-156.2m Other Debt
£+0.1m Net Derivatives + Provisions position
£-73.9m Pension deficit
= +£58.2m Net Assets
Now this immediately tells me that the company's assets currently more than cover its debts, which is always a nice thing. Of the assets, £209m is in land and buildings which could be sold and leased back if cash was needed urgently, and there's also a ~£175m bank facility which is untouched to help with debt repayment timing issues. In short, there is a low risk of this company actually going bankrupt as it has ~£385m of potentially available cash to cover its ~£260m of net debt. Arguably the land and buildings are undervalued here as they are carried at cost and as far as I can see they have been on the balance sheet for some time (at least since the 2000 annual report which is as far back as I can see) so should have appreciated somewhat but let's be conservative and keep it at cost.
Now you say, I've missed off one big liability! The net tax liability of £278m looks bad but when you examine it closer you can see it's actually ok.
From Note 21 in the 2010 annual report (I found it in the end!) we can see that £241.8m of the tax liability is due entirely to the intangibles. Divide this by 0.27 (the tax rate) and you get £895.5, which is the total amount of intangibles on the 2010 balance sheet. Hence, this tax liability isn't 'real' as such - I believe (and please correct me on this if I'm wrong as my accounting knowledge isn't great) that if the intangible assets were just written down to £0 (which is the value I'm assuming in this evaluation) that the £241.8m of tax liability would become £0, so I'm going to mentally write this off too given that I assign the intangibles no value in this analysis. Hence the actual net tax liability is:
£-62.5m
Given our £58.2m net assets from before leaves us with a grand total negative equity of only £4.3m, so the balance sheet is, in my view, almost perfectly balanced in terms of 'real' assets to 'real' liabilities.
A quick comment on the pension contribution: Having looked at the assumptions in the pension actuarial calculation they don't seem particularly excessive to me so I don't believe they'd be grossly overstating/understating the value of the assets so I'm happy to take the stated liability here as the 'true' liability. Another way to treat this would be to ignore it from the balance sheet and assume that the pension plan negatively impacts the cash flow/profitability of the business in the near future and discount the cash flows as such. In reality, this is what is happening - £35m a year is being set aside to fund this pension obligation.
OK - so given that I've covered the balance sheet and have found it to have no real net value (but no real liability either) what is the value of the cash flows the business can generate?
Before I value this I'm quickly going to state my general view of the business which is just my view and you may wish to adapt it in your valuation method. I don't think newspapers are dead, especially not in the tabloid, low-end of the market that the Mirror occupies. If you read the reports you can see that the loss of public sector advertising has been what has hurt revenues the most but in the long term when a recovery kicks in this will recover. Also, with the loss of NOTW and the gain of circulation Trinity should be able to hopefully increase the cost it charges for advertising as it now has a wider audience. In general, I see a lot of the issues that TNI faces to be cyclical and whilst I don't see great growth in the future I think the decline will stabilise and we will have a cash cow.
Having said that, I'm now going to be ultra-bearish in my cash flow calculation to allow a margin of safety through being conversative. I had a bit of a play with a DCF model and by assuming that the cash flows shrink by 8% every year for 10 years followed by a 2% growth rate terminally (an ultra harsh assumption I believe, as I say I think the decline is predominately cyclical rather than structural) I get a fair P/E multiple of a bit over 6. The FT says that the analyst average expected profit for 2011 is 24.2 eps, so ~£63m profit (and TNI say they expect results for 2011 in total to be 'in line with expectations', so I'm assuming they broadly make this target). Using my conservative multiple of 6, I value the cash flows as:
6 * £63m = £378m
Which dwarfs the 'real' negative equity of £4.3m I derived earlier. This gives us a total business value of ~£375m. If this was true, it implies an intrinsic share price value of 140p and a ~220% upside on what I believe to be a fairly conservative analysis. On top of this, the intrinsic value of the business should be increasing every year due to the benefit of an extra year of cash flows paying down debt and, eventually, returning value to shareholders in the form of dividends and maybe share buybacks. I believe this gigantic difference offers a huge margin of safety for investment, hence I am long TNI.
Other reference sources
http://boards.fool.co.uk/trinity-tni-half-year-results-12334968.aspx?sort=whole#12340100
http://boards.fool.co.uk/trinity-mirror-up-gt8-why-12302190.aspx?sort=whole#12314027
http://boards.fool.co.uk/trinity-mirror-tni-ims-rns-12256307.aspx?sort=whole#12257380
Risks
1) The decline is terminal, or at least worse than I'm expecting, and the company never recovers. Ipads/smartphones etc permanently replace newspapers.
2) The phone hacking scandal spreads to TNI with severe repercussions
Long at an average price of 48.7217
No comments:
Post a Comment