Tough outlook

Reporting on Friday was publishing company Johnston Press (LSE: JPR). Its trading update for the 17 weeks to 30 April showed that conditions have been as expected, with the company on track to meet guidance for the full year.

Its total revenue for the period was 0.2% higher, while digital advertising revenues moved 10% higher. Its on-network digital audience grew by 11% to 26m, with average page views up 17%. Furthermore, the acquired i newspaper continues to perform well, with sales volumes up 4% in the 12 months since acquisition.

Despite this, the company’s future looks challenging. Trading conditions for regional newspapers in the UK remain tough, as more consumers switch to online editions. They potentially offer lower revenue per reader than print editions, which is a key reason why Johnston Press is expected to record a fall in its bottom line of 27% this year, followed by a further fall of 13% next year.

However, with the company having a tight control on costs and a digital platform which is performing well, its long-term outlook remains relatively positive. Since it trades on a price-to-earnings (P/E) ratio of just 1.2, it seems to offer a wide margin of safety. Therefore, it could be worth buying right now.

Income potential

Sector peer Trinity Mirror (LSE: TNI) also faces a difficult outlook as consumers switch from print to digital. Its bottom line is forecast to fall by 10% this year, and by a further 1% in the following year. However, the market seems to have factored this difficult outlook into the company’s valuation. Trinity Mirror trades on a P/E ratio of just 3.2, which suggests its shares could move higher in the long run.

As well as capital growth potential, Trinity Mirror could be a surprisingly strong income play. Certainly, its earnings outlook is unstable and it lacks resilience, but with dividends representing just 17% of profit they seem to be highly sustainable at their current level. Since Trinity Mirror currently yields 5.2%, it could prove to be an attractive means of generating a high income return.

Looking ahead, the shift to digital looks set to continue. Therefore, it would be unsurprising for investor sentiment towards Trinity Mirror to become more downbeat. But given the potential for growth within digital in the long run and its high dividend yield, it could prove to be a sound investment for less risk-averse investors.

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Troubled publisher

Johnston Press (LSE: JPR) shares fell 9.5% in morning trading to 12.7p, and are now down a bone-jarring 97% since early March 2014. What’s gone wrong and are we looking at an oversold share that we should be buying?

The publisher has been recording pre-tax losses for several years, and hopes are pinned on the acquisition of the i newspaper in April — but it could be a tough task to get its net debt down to manageable levels. At the interim stage, in which the company spoke of continued “challenging advertising trading conditions,” that debt stood at £137.7m. That’s a significant reduction from the £146.1m level at 2 January, but still a lot for a company with a market capitalisation of only £13m and a six-month adjusted pre-tax profit of just £12.3m.

Johnston is in negotiations with its lenders, and has agreed some changes regarding a currently unused £12.5m facility, but it’s had to postpone a test of its lending covenant, which was due in September, to 31 December.

Forecasts put Johnston shares on a P/E of under one, though net debt that’s more than 10 times the value of the company would seem to account for that very low valuation. The questions now are whether the firm can pull itself out of the mire, which would presumably need a new financing round, and what value would be left for existing shareholders at the end of it?

Those are hard questions to answer and there could be a profit in it, but there’s too much risk for me.

Big profit from small things?

Nanoco (LSE: NANO) had a bad morning too, shedding 8.5% to 58.7p, after the firm deferred the accounting of some licence fee revenue — although it says it doesn’t affect its cash situation.

Nanoco, a maker of cadmium-free quantum dots (which are used for making high quality displays), saw its shares climb on rumours in advance of an agreement with Merck that was announced on 1 August (Merck will market Nanoco’s stuff to its own customer base) but that follows a longer-term decline.

After a 68% share price fall since February 2013, is Nanoco a tempting buy? On the upside, the company is clearly making good things for which there should be strong demand, and it might only need a few more deals to see its prospects improving dramatically — a trading update in August told us of significant commercial and technological advances.

But against that, we still have losses forecast for this year and next, and net cash stood at a modest £14.4m at 31 July (down from £18.3m at 31 January). Revenues for this year (unaudited) are said to be £1.9m, which isn’t insignificant, but it’s less than 2015’s £2m — and that cash pile surely can’t last much longer at the current rate unless revenue is hiked soon or new funding is sought.

Nanoco is clearly a risky investment, but it has the potential to turn into a winner in the relatively short term. I’m cautiously optimistic, though I think the next 12 months could be critical.

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One of today’s biggest risers is local newspaper group Johnston Press (LSE: JPR), whose shares are up by 17%.

The group’s adjusted pre-tax profit rose by 22% to £31.5m last year, while net debt fell by £14.8m to £179.4m.

The planned acquisition of the i national daily newspaper for £24m has been approved and will go ahead soon. Johnston says that the i deal will give the group access to a 20% share of the “quality market” and will increase earnings and improve cash generation.

However, the structural decline of the group’s business continued last year. Total revenue from continuing businesses fell by 6.8% to £242.3m. Operating profit fell by 7.5% to £50.6m.

The increase in adjusted pre-tax profits I mentioned earlier was mainly the result of lower finance costs, not improved trading.

Johnston Press currently trades on a 2016 forecast P/E of 2. This sounds cheap, but with sales falling and net debt running at 16 times trailing profits, I think the shares are too risky. I’d stay away.

Too late

Carpet manufacturer and retailer Victoria (LSE: VCP) climbed by nearly 9% this morning to a 52-week high of 1,519p. The group said that full-year profits for the year ending 2 April are expected to be “materially ahead” of current forecasts.

In my view this suggests an increase of at least 10% on current forecasts, suggesting adjusted earnings per share of around 80p. The group says that an increased focus on cash generation will also result in a fall in net debt. This is good news, as net debt has risen sharply over the last two years.

Despite this, I do have some reservations about Victoria. The shares currently trade on around 19 times 2016 forecast profits, and offer no yield. This seems quite a full valuation, to me.

A second concern is that companies which grow through a series of rapid acquisitions often end up coming unstuck. I’d like to see more evidence of sustainable profit growth and free cash flow before taking a more positive view.

In my view, it’s probably too late to buy into Victoria.

Strong outlook

Judges Scientific (LSE: JDG) is also an acquisitive business, but unlike Victoria has a long track record of success. Judges’ business model is based on adding small specialist businesses to its portfolio of companies which produce scientific instruments.

The shares are up modestly after today’s solid set of results. Revenue rose by 38.5%, thanks to last year’s acquisition of Armfield. Adjusted earnings per share were 32% higher, at 109.2p. There was some organic growth too — sales excluding Armfield rose by 4.9%.

Shareholders have been rewarded with a 13.6% dividend hike. This takes the total payout to 25p per share, giving a 1.5% trailing yield.

The outlook for 2016 appears strong. Judges said this morning that the group ended 2015 with an order book covering 11.9 weeks, up from 9.9 weeks at the end of 2014. The balance sheet also seems safe, with net debt of only £4.4m — much less than last year’s net profit of £7m.

Is Judges Scientific a buy? In my view it’s a good firm, but the 2016 forecast P/E of 16 suggests that upside may be limited. I’d hold for now.

The post Why Are Johnston Press plc, Victoria PLC & Judges Scientific PLC Rising Today? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Crystal Amber targets companies with unrealised, hidden or trapped value. It actively engages with the company to push for the outing of this value to benefit shareholders and Sainsbury’s (LSE: SBRY), Pinewood Group (LSE: PWS) and Johnston Press (LSE: JPR) are three companies where Crystal Amber has identified considerable potential.

Sainsbury’s

Just over a year ago, the Telegraph reported that Crystal Amber was in talks with international activist investment groups about engineering a major shake-up at Sainsbury’s.

Crystal Amber believed that flushing out a bid for Sainsbury’s from a large international retailer could realise significant shareholder value. In the absence of a takeover, another option was to push Sainsbury’s to sell off a chunk of its property, which Crystal Amber reckoned could allow as much as £2.25bn (117p a share) to be returned to shareholders.

Whether Crystal Amber got as far as opening a position in Sainsbury’s isn’t known. What we do know is that the grocer has gone in the opposite direction to a takeover with a proposed £1.1bn acquisition of Argos owner Home Retail.

Often shareholders of a company that’s taken over end up doing better than the shareholders of the company making the acquisition. That may be the case with the Sainsbury’s gambit. Argos doesn’t appear a natural fit, and the acquisition has the air of a company that feels it needs to do something in response to the structural shift in UK grocery.

Johnston Press

Local newsgroup Johnston Press has been struggling in the face of the print industry decline that it’s trying to manage by retaining stronger print titles and pursuing digital growth.

Crystal Amber upped its stake in the company as recently as 1 February, fortuitous timing because on 3 February Johnston announced that a reassessment of its pension plan liabilities had reduced the scheme deficit by £53m from £90m.

However, a week later Johnston announced a proposed “transformational acquisition” of the i newspaper for £24m. The board claims i will be a “strong strategic fit” and that the acquisition has met with a “positive reaction” from shareholders. I’m unconvinced by the strategic fit and why an activist investor would see merit in this acquisition, if indeed Crystal Amber does.

Pinewood Group

Crystal Amber first invested in AIM-listed Pinewood some years ago, in the belief that the iconic brand and technical excellence should have enabled it to deliver higher profitability. The activists have been a thorn in the side of chairman Michael Grade and chief executive Ivan Dunleavy on and off since.

The board’s aim of achieving a main market listing has been thwarted by a tightly-held shareholder register and last week came an announcement that: “The Board has now determined that it is appropriate to evaluate alternative opportunities to maximise value … which could include a sale of the Company”.

Pinewood’s shares jumped on the news and are trading at 530p as I write, valuing it at just over £300m. There could be further upside. Analysts value the business at £315m to £350m, and there’s potential for a bidding war with high interest expected from Chinese and US investors.

Crystal Amber has done well from identifying special situations for outing shareholder value (Aer Lingus and Thorntons have been notable recent successes) and Pinewood could be another.

The post Should You Buy Activist Investor Targets J Sainsbury plc, Pinewood Group PLC And Johnston Press plc? appeared first on The Twelfth Magpie.

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Furthermore, following a change to the scheme’s rules, Johnston Press will now be able to participate in any surplus when the scheme closes. Therefore, the application of accounting regulation IFRIC 14 (which resulted in a liability of £3m last year) won’t be required. This means that the pension scheme deficit is reduced by as much as £53m.

Clearly, that’s very good news for Johnston Press and its shares have soared by as much as 15% in response. However, they’re still down by 74% in the last year and investor sentiment remains relatively weak owing to the downbeat financial performance that has been a feature of recent years for the business. In fact, Johnston Press has failed to deliver a black bottom line in recent years and although its outlook is more positive than its past, it may be prudent to watch rather than buy it at the present time.

Long-term appeal

One stock that also operates within the technology, media and telecoms space is Vodafone (LSE: VOD). Its shares appear to be well worth buying due in part to the company’s strategy of recent years.

For example, Vodafone has invested heavily in its network and infrastructure as it attempts to improve its service offering to customers. This should allow it to at least maintain market share across Europe in future years, with a strategy of acquiring discounted assets such as Kabel Deutschland and Spain’s Ono also improving the company’s long-term growth outlook.

In addition, Vodafone is diversifying into new product areas so as to provide a more stable long-term earnings outlook. Its move into quad play is ongoing and could provide significant cross-selling opportunities while also de-risking Vodafone’s telecoms exposure.

As ever, Vodafone remains a highly attractive income stock. It currently yields 5.3% and with the outlook for the wider market being highly uncertain, its shares are likely to become increasingly popular due to their excellent track record of delivering steady rises in shareholder payouts. When combined with increased diversity and an impressive long-term growth outlook, Vodafone appears to have considerable appeal as a long-term buy.

Of course, Vodafone has suffered in recent years from its decision to focus to a greater extent on one geographical region: Europe. With GDP growth being slow, Vodafone has been hurt by the decision to scale back its North American operations, but with quantitative easing likely to boost demand in Europe, Vodafone could be a major beneficiary.

The post Does Johnston Press plc’s Latest News Make It A Better Buy Than Vodafone Group plc? appeared first on The Twelfth Magpie.

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Bovis Homes Group

Shares in housebuilder Bovis Homes Group (LSE: BVS) fell by 10% this morning after the group warned that a shortage of skilled labour and planning delays were putting pressure on profit margins.

Bovis shares have now fallen by 21% over the last three months, making the firm the worst performer of all the big housebuilders.

According to today’s statement, demand remains strong. Bovis’s average selling price is expected to rise by 7% this year. The problem is that new high profit margin developments, which the firm expected to start selling this year, will now be pushed back into next year.

Bovis reported an operating margin of 17% last year, and now expects this year’s result to be “marginally higher”.

The firm didn’t issue a formal profit warning today, but I suspect analysts’ earnings forecasts may now be trimmed. On this basis, the shares currently trade at 9-10 times 2015 forecast earnings. I think that’s enough, at this point in the housing cycle.

Poundland

One of today’s biggest fallers was Poundland Group (LSE: PLND), whose shares are down by 20% to 224p at the time of writing.

The group said that underlying pre-tax profits fell by 26% to $9.3m during the first half, despite sales rising by 6% to £561m. Poundland blamed “an exceptional period last year” for some of the falls, suggesting that this year’s profits are more typical than those the company reported last year.

However, the main focus for investors over the next year will be the performance of the 99p Stores acquisition, which will increase the number of Poundland stores by 40%. Poundland’s chief executive Jim McCarthy says the firm is confident that the 99p Stores can add at least £25m of additional earnings before interest, tax, depreciation and amortisation (EBITDA) to the business.

Investors will want to see how much of this is turned into real profit. Poundland admitted today that the third quarter has seen volatile trading and results will be heavily dependent on sales in the six weeks before Christmas.

After today’s falls, Poundland shares are trading on a 2015/16 forecast P/E of about 16. Given the uncertain outlook, I think there is better value elsewhere.

Johnston Press

A forecast P/E of just 2 was not enough to stop the shares of local newspaper publisher Johnston Press (LSE: JPR) falling by 11% this morning. The slide came after the group said that underlying revenue fell by 8.8% during the third quarter.

Circulation revenues from printed papers fell by 7.2% during the third quarter, while print advertising revenues were down by 14.7%. Replacing this lost revenue with digital revenue is proving difficult. During the third quarter, the number of unique users visiting the firm’s websites rose by 22%, but underlying digital revenue only rose by 8.4%.

At the half-year point, Johnston had net debt of £183m and an £87m pension deficit. Collectively these are 4.6 times greater than the firm’s market capitalisation.

Johnston has survived this far by continually cutting costs, but ultimately needs to make some money. The market currently values these shares on a forecast P/E of just 2. This is a warning that the firm’s debt may yet cause the business to fail.

The post Why Are Bovis Homes Group plc, Poundland Group PLC & Johnston Press plc Shares Plunging Today? appeared first on The Twelfth Magpie.

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Although revenue from continuing operations fell by 24% to £662.2m and underlying earnings per share fell by 25% to 93.9p, the firm’s dividend rose by 18% to 30p, giving a trailing yield of 8.6%.

Cash generation remained very strong, as the firm continues to sell non-core assets. Net debt fell from £68.8m to just £1m, while the firm’s cash balance rose from £31m to £41m.

Today’s results leave Hargreaves shares trading on a trailing P/E of just 3.7, with a dividend yield of 8.6%. The reason for this, of course, is that mining and supplying coal to UK power stations and steel works is a declining business.

Hidden value?

Hargreaves is very much a ‘cigar butt’ type value investment. Such deep-value investments can prove very profitable, but they can also be value traps which destroy investors’ capital.

Although Hargreaves shares trade at a 30% discount to their book value of 462p, there’s no guarantee that this value will be realised. It might equally end up being written off as the firm’s coal business declines.

Today’s results bring some extra clarity to Hargreaves’ strategy. The disposal of non-core assets is now pretty much complete. Going forwards, the firm will operate a scaled-back coal mining and trading business, alongside a successful but low-margin bulk logistics operation. This will increasingly handle biomass and waste, instead of coal.

To diversify away from coal, Hargreaves is hoping to use its substantial land holdings for onshore wind farms and housing developments. Both seem logical, but it’s too soon to say how successful either venture will be financially.

I own shares in Hargreaves, partly because I rate the firm’s management very highly and have been impressed by their actions so far. In my view, the shares remain a risky but potentially rewarding buy.

Johnston Press

Another cigar-butt type value play with a very low valuation is local newspaper group Johnston Press (LSE: JPR), which announced its interim results today.

Underlying earnings per share from continuing operations rose by 54% to 11.44p for the last six months, despite a 4.6% drop in underlying revenue, which fell to £128.9m. Today’s results suggest full-year earnings should be in line with expectations, leaving the firm’s shares on a 2015 forecast P/E of just 4.4!

Going digital?

Like its peer Trinity Mirror, Johnston is attempting to shift its business from printed newspapers to online.

The problem is that while 68% of Johnston’s readers are now online, only 20% of the firm’s advertising revenue comes from its online operations. The remainder comes from print, and print advertising revenue fell by 9.5% during the first half of the year. Revenue from newspapers sales was also 5% lower.

Johnston Press might find a solution to these problems, were it not for a rather weak balance sheet. Net debt at the end of the half year was £183m, and Johnston also has a pension deficit of £87m.

The firm doesn’t pay a dividend and is unlikely ever to do so in my view, as all of its surplus cash will be required to repay its debts and meet its pension liabilities. In my view, these liabilities make Johnston Press uninvestable.

The post Are Hargreaves Services plc And Johnston Press plc Deep Value Buys? appeared first on The Twelfth Magpie.

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Yesterday, Johnston Press’s shares plummeted 20% after the group issued a profit warning. Today, Entertainment One’s shares are down 10% as I write, following news that a long-time institutional supporter has slashed its stake in the company by a third.

UK local and regional news group Johnston reported that having “traded well” in Q1, performance in Q2 was such that first-half revenue is expected to fall by 5% year on year. Management blamed “a slowdown in general trading as well as specific weakness in the run up to, and the period immediately after the election”.

On the face of it, the 20% fall in the shares appears harsh. The company said first-half profits are likely to be only “marginally” below last year, that, based on most recent indicators, July is expected to show an improvement and that “we anticipate full-year profit will be slightly below market expectations”.

However, Johnston is a heavily indebted company, with net debt of £185m versus a market capitalisation of £120m and a millstone of interest payments. If Q2 proves to be more than a blip — or “off-trend trading”, as management called it — the shares could have a lot further to fall. And the company did warn that, while it expects revenue trends to improve, sales “may be impacted by market volatility during the rest of the year”.

As an old-industry business that was late to respond to the digital age, Johnston has been struggling for years. If I held the shares, I would be tempted to sell and buy into Entertainment One.

Entertainment One is a leading international entertainment company that acquires, produces and distributes film and television content. Peppa Pig is probably Entertainment One’s best-known property, but the company has a large and diversified portfolio of media assets.

Since 2010, Entertainment One’s revenue and earnings have doubled. And management has a credible strategy to double the size of the business again over the next five years. Increasing scale should drive Entertainment One’s financial return, and there is a virtuous circle as the company attracts and partners with more and more of the world’s best creative talent.

In contrast to Johnston Press, today’s hefty fall in Entertainment One’s shares has nothing at all to do with business performance or outlook. The company announced that long-term backers Marwyn Value Investors have sold 9% of their stake in the business, by way of a placing to other institutional investors.

I don’t see anything sinister in Marwyn’s move to take some profits after supporting Entertainment One’s tremendous rise from an original AIM listing to its current listing on the Main Market and membership of the FTSE 250. Marwyn still holds about 18% of the company’s shares. Entertainment One’s CEO said today that the directors “look forward to Marwyn’s continued support as an investor”. The knee-jerk reaction of the market seems to be a response to the possibility that Marwyn could decide to sell more shares, creating a stock overhang and short-term weakness in the price.

However, none of this detracts from Entertainment One’s long-term prospects, and I see the stock as good value after today’s drop. The company trades on a current-year forecast price-to-earnings ratio of 13.5, falling to 11.7 next year on the back of forecast mid-teens earnings growth. As such, now looks to me like an opportune time to buy.

The post Should You Sell Johnston Press plc To Buy Entertainment One Ltd? appeared first on The Twelfth Magpie.

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This may come as something of a surprise, with Johnston Press experiencing a relatively robust first quarter. However, the second quarter of the year has been far more challenging, with a slowdown being experienced around the General Election in May, with the company not expecting its performance to pick up in July. As such, profit for the full year is set to miss market expectations.

In fact, Johnston Press has said that revenue for the first half of the year will be around 5.5% lower than in the comparative period last year, with a continued decline in advertising spend and in circulation hurting the company’s performance. This is a faster rate of decline than was experienced in the same period last year, when a fall of 4.3% was reported, and will have a direct impact on the company’s profitability.

Of course, while disappointing, today’s update also provided hope for investors in Johnston Press. Digital revenue is up around 17% in the first half of the year and the company believes that there are positive indicators coming through, with continued strong cash flow and growth in digital audience being notable examples.

Furthermore, Johnston Press continues to be very attractively priced – even if it misses its profit expectations for the year. In fact, it now trades at a significant discount to net asset value, with it having a price to book (P/B) ratio of only 0.76. And, with it previously being forecast to deliver earnings per share of 28.3p for the full year, it was trading on a forward price to earnings (P/E) ratio of just 5 before today’s price fall. In other words, Johnston Press was dirt cheap based on previous forecasts and, even though it will now miss those forecasts, its shares still appear to offer good value for money – especially if it can improve its performance during the remainder of the year.

Clearly, the publishing of regional newspapers is an industry that is enduring a major transitional period, with digital fast becoming the place where most people consume such titles. And, while this means pain in the short run for Johnston Press, it appears to be making the necessary changes to adapt its business model to changing customer tastes and to new technology.

So, while the short to medium term performance of the business may disappoint, its longer term prospects as an investment appear to be relatively bight, albeit risky. And, with such a low valuation, there appears to be a significant amount of potential reward on offer for less risk averse investors.

The post Johnston Press plc Plunges Over 15% On Profit Warning appeared first on The Twelfth Magpie.

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