Reach plc

Even Warren Buffett seems to have given up on newspapers. Reach plc is one Britain’s largest news publishers by circulation reaching nearly 47m readers per month. It owns titles such as Daily Mirror and Daily Express, among nine national newspapers, over 110 regional papers and two national magazines.

The key issue is here is the steady decline of the print business due to secular factors. Management is placing their bets on the digital business making up for these losses. They value the intangibles, which includes publishing rights, at over GBP 800m after impairments. This constitutes book value of GBP 593m.

The market disagrees – valuing it at under half that at GBP 300m.

There may be a bleak future for national papers competing online. The regional papers, however, do seem to possess a competitive advantage offering local content to an interested community of readers.

Nevertheless, examining the financials, the company generates cash from operations of about GBP 140m.

Although the company owes no external debt as at December 29, 2019, it runs a significant pension deficit on its defined benefit schemes of GBP 296m. Management have poured in contributions of GBP 50-100m per year in recent years to plug this deficit. It uses a 1.94% discount rate – changes of 0.5% would increase/decrease this deficit by GBP 220m. With the extraordinary recent easing of interest rates, such a scenario is not far fetched.

The current deficit could be financed in under two years, which doesn’t pose much financial risk. Considering the sensitized increase of GBP 220m, the deficit would be covered in under four years. These are risks that senior debt holders would be willing to take in a leveraged financing, and appears manageable.

The company has limited needs for reinvestment and sports a dividend yield of just under 7%, which is amply covered by net cash flows.

The equity holders receive a current normalized after-tax earnings yield of almost 40% (or 2.5x earnings) subject to the risks of a declining industry. In our view, this offers a substantial margin of safety to compensate for such risks.

The company has a GBP 65m revolving credit facility it can draw during the Covid-19 slowdown. Further, a large investor (Schroders) increased their stake on March 27^th. Investors wouldn’t go far astray accumulating shares near the current market price of 97p.