Reach — Marked progress on issue resolution

Research: TMT

Reach — Marked progress on issue resolution

Reach’s FY23 figures were broadly in line with market expectations. The key messaging, though, is that the two big uncertainties overhanging the stock are being clarified in timescale and in quantum. Firstly, agreement has been reached with the pension trustees, substantially reducing the ongoing funding requirement from FY28. Secondly, December’s High Court ruling on time limitation for the historical legal issues gives far better clarity on the amounts to be paid out and shortens the execution timescale. This gives management much improved context in which to plan the necessary investment from cash flows to continue to boost the data-driven revenue line. We would expect the substantial valuation discount to start to narrow.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Reach

Marked progress on issue resolution

Media

QuickView

6 March 2024

Price

59.45p

Market cap

£191m

Share price graph

Share details

Code

RCH

Listing

LSE

Shares in issue

322m

Business description

Reach is the UK’s and Ireland’s largest commercial news publisher. It is home to more than 130 brands, from national titles like the Mirror, the Express, Daily Record and Daily Star, to local brands like MyLondon, BelfastLive and the Manchester Evening News and the more recently launched US titles. The group has an audience, online and offline, of 48 million per month.

Bull

Quantification and timeline on pension and claims clarified.

Potential for growth of data-driven income streams.

Further 5–6% in cost reductions for FY24.

Bear

Difficult advertising backdrop.

Continuing decline in print sales volumes.

Ongoing court cases are a distraction.

Fiona Orford-Williams

+44 (0)20 3077 5739

Reach’s FY23 figures were broadly in line with market expectations. The key messaging, though, is that the two big uncertainties overhanging the stock are being clarified in timescale and in quantum. Firstly, agreement has been reached with the pension trustees, substantially reducing the ongoing funding requirement from FY28. Secondly, December’s High Court ruling on time limitation for the historical legal issues gives far better clarity on the amounts to be paid out and shortens the execution timescale. This gives management much improved context in which to plan the necessary investment from cash flows to continue to boost the data-driven revenue line. We would expect the substantial valuation discount to start to narrow.

Data-driven revenues show way forward

The FY23 figures show a clear contrast between ‘standard’ participation in the digital programmatic advertising market and in using first-party data to add value. Open market yields were very weak (revenue/page view down 35%) with referral traffic hit by Facebook de-emphasising news in its feeds (down 24%), resulting in these digital revenues falling 22%. In contrast, data-driven digital revenues only dipped 4%, with revenue/page view up 23%, and Reach offering advertisers the ability to address the audiences that they want, when they want them. There is strong potential for income growth from affiliates, partnerships and e-commerce, given Reach’s 36m digital audience. One-third are registered, generating valuable data. Print continues to be resilient, with habitual buyers, and helped by cover price increases.

Cash obligations coming into focus

With the uncertainty over the potentially highly significant sums needed to resolve the pensions and claim settlement bills, Reach has been unable to push ahead as fast as it might have liked on building out the platform and growing its data-driven revenue base (and therefore rebuilding margins). The agreement with the MGN scheme trustees over the 2019 and 2022 reviews should decrease the payments by c £40m from FY28 (FY23 funding: £60m). The cost of settling historical legal claims is now put at c £18m, to be paid over FY24 and FY25, enabling a line to be drawn. 95% operating cash flow conversion shows the strength of the underlying business. Reach recently cancelled its share premium account, lifting distributable reserves and underpinning the payment of a dividend that gives a substantial yield.

Valuation: Deeply discounted

Reach’s share price still reflects the historical uncertainties. We would now expect the valuation to start moving towards reflecting the underlying business prospects.

Consensus estimates

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

601.4

103.3

27.1

7.3

2.2

12.3

12/23

568.6

93.0

21.8

7.3

2.7

12.3

12/24e

539.2

94.1

22.4

7.4

2.7

12.4

12/25e

528.5

96.7

23.0

7.5

2.6

12.6

Source: Refinitiv. *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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