NATIONAL newspapers are not, on the face of it, attractive investments. Circulations are under pressure in the UK and in other developed markets. Advertising collapsed in the aftermath of the dot-com boom and has yet to fully recover. Yet, if you avoided investing in newspapers over the past two years, in line with these developments, then that decision would have been a mistake.
Take Independent News & Media, best known in the UK for owning the struggling Independent title. Yet shares in the Dublin-based, but London-listed, company are up by 65 per cent in two years. Some of that increase stems from the fact that The Daily Telegraph fetched £665 million at auction, reminding everybody that there is always somebody willing to pay a fancy price to be a proprietor.
There is a little more to the company’s success. First IN&M is making financial progress with The Independent, which lost £10 million last year after a succesful move to the smaller compact form. A sharp increase in circulation has been followed by a jump in advertising, and executives are optimistic that the newspaper will finally turn a profit next year.
The Independent, though, is a small part of the story, and IN&M generates only a small part of its income — 5 per cent — from the UK (and all of that is from the Belfast Telegraph). The bulk of the business is in markets where competition is more sedate and profits more certain — in Ireland, and in Australia and New Zealand, through a 40 per cent shareholding in APN, which owns radio and newspapers. That contributed to a reassuring interim trading statement issued yesteday, which said that advertising was growing at double-digit rates across the group and circulation revenues were up by low single digits.
There is one further element, though — a growing exposure to emerging markets. A market-leading position in South Africa accounts for 13 per cent of profits, and rising literacy, and new launches — a Zulu-language title for instance — is growing that business rapidly. Now the company is trying to repeat the feat in India, where it has just bought into the leading Hindi paper. All this should encourage the investor, although at €2.56, and 16 times earnings, the stock is fairly priced. Hold.
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Savills
SHARES in Savills slipped 5p yesterday after the upmarket estate agent and commercial property adviser cautioned that sales of new homes were slowing, amid a weaker housing market.
The news was predictable enough after downbeat noises from the large housebuilders in recent weeks. Luckily for Savills this is not where it earns its biggest fees from. The group may be best know for selling posh houses but the commercial division is the real powerhouse behind group profits. The company has an extremely strong investment division, which specialises in selling large commercial office blocks and shopping parks.
After a record-breaking year in 2004, many in the commercial property market forecast that the market would cool in 2005. So far this has not proved to be the case and investors are still snapping up commercial property as though it is going out of fashion.
The boom will inevitably peter out at some point — this could be later this year or early next year, but given the huge volume of business Savills has enjoyed so far this year, the market would have literally to grind to a halt for the company not to trump last year’s record-breaking performance, which earned £79 million of bonuses for its staff. Meanwhile in the residential market, although new home sales outside London have cooled, the market for £1 million-plus homes in London remains strong.
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This should ensure that Savills makes further progress this year and could trigger a higher than expected dividend payment.
Analysts have currently pencilled in 20.5p — a rise of 11 per cent. But the likelihood is that Savills could increase the payment by 20 per cent or more.
At present the shares generate a forward dividend yield of 3 per cent, but if a larger than expected payout does emerge, this would rise to 3.4 per cent. For investors prepared to stay in for the long term, this is a well-run company that throws off bags of cash. Nevertheless after the extraordinary share price run, cautious investors should probably lock in at least some profits.
Inchcape
SHARES in Inchcape have rallied in recent weeks after the car dealer bounced back from fears it may be hit by a downturn in consumer spending. Yesterday’s pre-close trading statement will have done little to unnerve investors since that rally, as the company reassured the City that trading was in line with expectations. Admittedly, trading in the UK has softened as sales of smaller cars — for which buyers typically need to borrow money — have fallen. The group specialises in distributing premium cars such as Mercedes and BMW, which has proved a more resilient market. What is more, the UK accounts for just 14 per cent of operating profit.
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Australia, which together with New Zealand accounts for 16 per cent of operating profits, looks on track for record sales and trading is also good in Singapore.
Meanwhile Inchcape’s move into Eastern European countries such as Poland and into the Balkans is likely to boost profits further in the coming years. Like Hong Kong, Singapore and Australia, these countries offer higher profit margins than more competitive markets such as the UK.
Shares in the group trade on 11.8 times prospective earnings — at the top end of the peer group range — and yield just 2.6 per cent. Nevertheless, the group’s share buyback programme, which it is now just under halfway through, should help to bolster the stock this year. Meanwhile the group’s broad geographic spread, strong balance sheet and good track record mean that it should be capable of delivering further progress. Hold.