Future PLC

Ticker: FUTR Current share price: 8.5p

MKT CAP: £28m Share issue: 333m

52-week high: 20.25p 52-week low: 5.84p

Company overview

This company specialises in publishing magazines in areas such as Technology, Entertainment, Music, Creative and Sport and Auto like T 3, Company Arts and Digital Camera. The company make their money from the following areas: Circulation, Advertising, Customer Publishing, Licensing, Events and others. This company belongs to Media sector.

Investment Thesis

BULLISH POINTS

Most of the company’s debt is being paid off and debt is down from £30.2m (2009) to £11.5m (2013).
The company seems to be making a turnaround from the lows in 2011 (made a loss of £19.3m) to net a comprehensive income of £4.5m in 2013.
Management seems very upbeat about the future of business pointing to high digital revenue growth.
Some of the ratios such as profitability shows improving margins from the lows of 2011 and the solvency ratios show the company is becoming more financial stable based on their abilities to pay down their debts.
BEARISH POINTS

The company’s revenue is still falling, £153m (2009) to £112.3m (2013), a CAGR decline of 6%, questioning the company earnings quality.
(Free Cash Flow to Equity) has declined from a positive £11.96m in 2009 to a negative £11.96m in 2013.
The business seems to be getting smaller year-on-year, just look at the balance sheet over the five year period.
Cash and cash equivalent has declined faster than debt registering a CAGR of (20.6%).
The company has agreed with HMRC over a tax dispute in 2003 to pay back £6.2m plus interest. The company will pay £1m/year over five year and a balloon payment of £2m at the end of the five year period.
KEY RISKS

There are a lot of problems with the business at the moment and no one can deny the performance of the company’s share price has been negative over the long term. These are my concerns:

In the company’s segment reporting footnote and WITHOUT explanation the company has ‘added back: Distribution Expenses’ to arrive at the total gross profit but when working out the operating profit this same distribution expenses get deducted. Consequence would be that the company did not account for distribution expenses as they’re cancelled out and could possibly be overstating their gross profits and net earnings, this has been going on since 2005.
Management use of ‘NORMALISED’ Revenue (which excludes revenue from discontinued operations but includes new operations) rather than ‘STATUTORY’ Revenue in order to show a slower decline in revenue though I agreed that it is prudent. The misleading thing is that in the company’s presentation 2012 normalised revenue is £117.7m, but in the company’s 2013 presentation it states 2012 normalised revenue of £103.6m, a difference of £14.1m. (WHY THE DIFFERENCE? Possibly to show a growth in revenue of 3.2%, instead of a decline of 9.2%).
Management focus on digital revenue growth in their presentation don’t reflect the whole business, this is misleading to the retail investors because sales are falling year-on-year and any digital sales doesn’t even cover the physical magazine business that are showing a faster rate of decline.
The company’s share price has remained bad value for equity investors because they have peaked at over £9/share in 2001 and reached a new low of 5.8p/share currently.
CURRENT SITUATION AND VALUATION

Although the share price has stabilised in a range between 12p/share to 22p/share it has since made a new low of 5.8p/share from the latest trading update and as management quote: ‘This has led the Board to conclude that the EBITDAE out-turn for the full year is anticipated to be below normalised FY13 and therefore significantly below market forecasts for FY14.’ This is a stark contrast from management statement in their annual report painting a picture to investors’ mind of how the strong fourth quarter in 2013 is going to continue into 2014. And of course referring to how successful their digital sales are when in reality these (probably) the same customers were only making digital purchases ever since the introduction of the iPad tablet.

Valuing company based on the sale of their non-core assets

Working out the intrinsic value of the business is little harder than your normal FTSE 100 or 250 company because of the fluctuation on their dividend pay-out and lack of information in working out the required rate of return for equity investors. So I decided to use the sale of these non-core assets to derive a break-up value for the business.

To arrive at my valuation for the company, first I combined the two transactions together to arrive at £12.075m (which is the gross consideration); £15.1m (revenue) and £8.4m (gross assets). Secondly I decide to value the business using two factors:-

i). Using gross consideration amount to divide by gross asset amount to arrive at a factor of 1.4375 and multiplying that by the company’s assets of £92.7m to give £133m.

ii). Using gross consideration amount to divide by revenue (discontinued business) to arrive at a factor of 0.799 and multiplying this by the company’s revenue of £112.3m to give £89.7m.

Using the laws of averages I have arrived at a value of £111m. The company needs to pay off their liabilities and this leaves proceeds of £85.7m for shareholders. Taking account of fees, severance pay and among other things I have arrived at the assumption of £15m in costs, which give shareholders of £70m or 21p/share (a near 300% upside of current levels).

The most conservative investors would take account the risks that still exist for company and I have worked out the aggregate amount net of UK taxes stand at £87m (although this figure could be under if overseas' taxes are taken into account) there're the valuation would be based on a speculative value. The current valuation would be too high for them based on these findings.

On a technical basis, using the following momentum indicators: - MACD (12, 26, 9), RSI (14), Directional Movement (14) and Stochastic (14). Using the daily interval the momentum indicators are very oversold, but showing ‘LOWER LOWS’ except for RSI and Stochastic. On the weekly interval the indicators are showing lower lows on a one year period, but in a three year period the indicators are beginning to show a higher lows compared to the share price movement of lower lows.

Changing the time period of the momentum indicators to MACD (24, 52, 18), RSI (28), Directional Movement (28) and Stochastic (28) we can evaluate on daily interval all the momentum indicators are showing ‘LOWER LOWS’. On a weekly interval the momentum indicators are still forming their pattern therefore proves inconclusive.

The company long-term performance has massively disappointed shareholders any long term holders would have saw their holdings completely wipe out. The company is underperforming the sector index by the widest margin and looking at the five-year chart the divergence on a rebased price between the two graphs stand at over 80%.

FINAL THOUGHT

Taking of everything that I have researched the company has serious issues about the longevity of the business (declining y-o-y sales) the company in my opinion is really speculative and there are three possible outcomes:

The business not recording their distribution expenses would lead to accounting problems where bank covenant is likely to be broken then any value left of the business would go directly to the bank. Therefore in this scenario the company’s fair value is zero. Given the current valuation of £24m therefore it is overvalued.
If the company’s accounts are true then the break-up value of £70m or 21p/share is the best outcome for shareholders. Therefore in this scenario there is a near 300% upside from current levels, and then current valuation is under-valued.
For those technical investors out there the momentum indicators of higher lows has not been really been confirm due to the recent share price decline therefore formation is needed. In this scenario the technical investors have the luxury to wait for a lower price to speculate on this company and if there is a further decline to new lows with higher lows on the momentum indicators giving a clear convergence signals then any upside could be over 50%.