Daily Mail & General Trust: Valuation Attractive
Edison | Apr 09, 2014 08:12AM ET
A delay on the rollout of RMS(one) turns what was a major catalyst for the stock into a two-way risk factor. Slowdowns for newspaper advertising and Evenbase look less concerning in our view. Overall we still believe Daily Mail & General Trust (DMGOa.LSE) can generate a mid-teens EPS growth rate. With valuation attractive relative to this growth, and several potential near term catalysts, we stay positive despite the question mark now hanging over RMS(one).
Following a uniformly positive update in February, DMGT returned to more traditional ways in its update last week with a more mixed trading picture across its diverse portfolio. A further setback on the rollout of RMS(one) takes away a significant positive for the stock: the range of outcomes on RMS(one) now stretches between a 10%-plus boost to group EPS growth and a c £100m write-off, with low visibility for the next six to nine months. Slowdowns for newspaper advertising and digital job ads (Evenbase) and FX pressures from a weakening US dollar are less of a concern in our view.
h3 Minor cut to estimates/h3Delay on RMS(one) is more of a blow to sentiment than to forecasts, with slower revenue build-up from the new product offset by lower costs and increased capitalisation of start-up costs. Overall we reduce our EPS estimates by 3% for the current year, 3% for FY15e and 2% for FY16e. Our fair value estimate (SOTP-based) reduces by 4% from 1,120p to 1,070p (23% upside).
h3 Valuation attractive, but now a ‘show-me’ stock/h3The stock had already retraced ahead of this update, and with a 7% fall on the day is now 19% below the high of 1,074p reached on 12 February. With our EPS estimates reducing only 2-3%, the valuation looks more attractive in our view at 15.8x 2014e EPS falling to 14.2x for 2015e (both calendarised). Granted, this is now more of a ‘show me’ stock regarding the investment in RMS(one). Overall though, we believe the portfolio remains positioned to deliver several years of mid-teens EPS growth (and close to this even if RMS(one) flops). In the nearer term we see several positive catalysts in the potential IPO of Zoopla, cyclical exposure to the UK economy, increasing likelihood in our view of a cover price rise for DMG Media, and further bolt-on acquisitions similar to the recent purchase of DIIG.
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