Stock Pitch - Reach (LON:RCH)

5th Nov '20 by Jack Brumby

14 comments 6891 reads

Reach (LON:RCH) is attempting to extricate itself from a structurally challenged Print industry and aims to re-focus on Digital Advertising - a change driven in part by its new Board, which is spearheaded by Jim Mullen.

The company is very cheap at just 4.1x reported FY19 EPS (3.2x normalised FY19 EPS) - but it has remained resiliently cash generative throughout its trials and tribulations. It's not all roses at Reach, but a valuation of just 4.6x TTM free cash flow does suggest a margin of safety.

Among the top four of the UK's digital assets (Google, Facebook, Amazon, and Microsoft), Reach estimates that more than 90% of customers have signed up and provided their data.

In contrast, Reach has gone from just 2% of customers to 8% between FY19 and H1 20. Increased customer engagement will enable Reach to better tailor advertising. Importantly, a lot of the necessary technical resource is already in house. Reach does not anticipate significant capex spend. In fact, it is actively cutting costs in its Print business.

As Mark Twain once wrote of a prematurely published obituary: Reports of my death are greatly exaggerated. The pitch is that there is life after Print, and Reach can successfully monetise its digital content to such an extent that the current valuation makes it cheap.

The share price has moved fast: from initial research for a related article (see here) through to Investment Club buy/sell decision, RCH has appreciated by around 20% (from 104p to 124p). So has the window of opportunity closed, or is there still value on offer?

Profile

Reach, formerly known as Trinity Mirror, is in the Consumer Cyclicals sector and owns and operates a portfolio of Print and Digital newspapers and magazines. It trades on the London Main Market.

What is the opportunity type?

Reach has a strong blend of Ranks.

It's classified as a Speculative Mid Cap Super Stock, with a low forecast PE and strong historic cash generation. It is a turnaround situation, as shown in the longer-term share price chart below.

What is the business model?

Reach produces and distributes content through paid-for and free newspapers, magazines, and websites.

Source: company website

Digital (15% of revenue) is a network of over 50 sites providing 24/7 coverage of news,…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Gromley

5th Nov '20

That's a very good summary Jack.

One thing though that you touch on that I think deserves further emphasis is their strong track record in driving out costs in the legacy businesses. As they have acquired businesses over time they have progressively driven out costs to compensate for the declines in the print circulation business.

Like other businesses they have taken advantage of (and I don't mean that in a negative sense) the pandemic to accelerate transformation / cost reduction approaches.

In the HY results announced at the end of September they told us their latest transformational programme

is now materially complete with anticipated annualised savings of at least £35m.

Taken in the context of 2019 Net Profits being £94m (after Opex of around £200m) that is a pretty profound number. I am doubtful that has been fully reflected in the 2021 analysts forecasts which show only a modest improvement in profits.

dfs12

One useful by-product of the crazy EU cookie law... websites have to ask permission for the storage of their cookies. Reach present their cookie request in a large box titled "REACH". I recently noticed that 9 times out of 10 when searching out info on up and coming football matches the best info was presented by Reach sites. Try it yourself...

Although it may seem irrelevant to non football fans I think it shows that they have a focussed team of motivated reporters putting out content in a timely fashion on websites that are extremely well optimised for search engine positions. I suspect that they rank well on most other local info other than football.

As a result I have started investing in Reach as they're clearly not being associated with the sector that i think will ultimately be their core market. People still view them as a dying print business.

carmensfella

6th Nov '20

Just to mention that Reach will feature in our MelloBASH (Buy, avoid, sell or hold) panel session this Monday and will be one of five companies analysed by the panel of fund managers, analysts and well known investors. It is an action packed 3.5 hour evening event and the full details of the programme are here....

https://melloevents.com/upcoming-event/mellomonday-9th-november/

Companies to be covered on Monday include Peloton, Reach, Tremor, Tristel, Versarian

If any of you would like to join the audience and there is participation via a poll at the end of each company review then Stockopedia tickets are half price using this code ....MMStocko21

Jack Brumby

Thanks Gromley,

Good point on the cost cutting - 'at least £35m' is a pretty impressive achievement in a relatively short span of time. It shows there are a couple of ways Reach (LON:RCH) can drive profitable growth.

Pension deficit reduction is another - it might take a while for the benefits of an improved pension position to be reflected in cash flows but the direction of travel, for now, is positive at least.

And then of course the pivot to Digital Advertising. Still a bit of an unknown quantity to my mind, but if the group can replace Print revenue with Digital, that will be positive for margins.

Next update on 27 Nov, IIRC

Cuddlesticks

Great article Jack.

I just wonder about the revenue growth potential. I think they have a great product suite of local newspapers and I regularly use the Daily Record, Stoke Sentinel and more. Each time though I feel flooded with adverts which makes me wonder if there is room for more adverts or will they be able to charge more for each advertising slot? Or can they develop more slick and productive advertising methods?

Given they’ve got some way to go before on line revenue is as large as current print revenue I’m struggling to convince myself on this one, though I like the PER, the cash generation and newspaper products they sell.

Chriskay

Great article Jack. I fully appreciate their targeted migration to digital but in the meantime I am just wondering how they will maintain their print circulation and revenues during another protracted lockdown? In other words how does the printed matter get into the readers hands? Sorry if I am missing something obvious.

Chris,

"Newsagents" stay open during the lockdown (most of them are effectively convenience stores these days anyway) and in fact there was an uptick in paper delivery during the first lockdown.

It is true of course that the lockdown is somewhat negative for the physical newspaper business, with lack of commuting especially, but most of that was curtailed already.

Personally I don't think a lot will have changed for the physical paper side of things since they reported being "materially ahead" at the end of September. More recently Daily Mail and General Trust P L C (LON:DMGT) were positive in their statement a couple of weeks ago.

DMGT will give a further update on the 23rd and Reach on the 27th so we will know more in he next few weeks.

Laughton

"In other words how does the printed matter get into the readers hands?"

Supermarkets, newspaper shops, corner shops - all treated as "essential" and, as last time, will be selling newspapers.

Philip999

18th Nov '20

@jack Thanks for the article. Any idea what the margin mix is between digital and print?

27th Nov '20

Reach (LON:RCH) trading update today - positive language but light on actual trading numbers. The stock opened up c8% but has since fallen to +3.3%.

There was an analyst call with some of the key takeaways being good margin progress, further Print cost cutting in store, and good digital performance.

Paul's covering it later in today's SCVR. There's an N+1 broker note out too (you can find it on Research Tree if you have an account there) with an intrinsic valuation of 310p.

DYOR

17th Dec '20

Another update from Reach (LON:RCH) on its Customer Value Strategy, with shares up 6% to 140p at time of writing.

Highlights include:

Over 5 million customers have registered with Reach (ahead of target) and a series of trial advertising campaigns are being run using improved customer data,
The initial trial campaigns ran during November and December and cover a range of sectors from fashion retail to betting and lottery.
Q4 digital revenue performance is on track to be the highest on record, and expected to exceed 20% year on year growth
Reach will continue to build its offering to brands and agencies during 2021 based on the enhanced data and insight offered by Reach ID (the unique identifier that enables enhanced customer data)

Edward Croft

5 million is well ahead of target. Weren't they aiming for 8 or 9 million over 2 years?

10m by the end of 2022 was the figure I seem to recall so it does look like they are nicely ahead of target.

I particularly like the 20%+ YoY digital revenue growth. One of my key scepticisms has been whether they can successfully monetise digital, so that looks promising.

8th Jun '21

Big breakout on Reach (LON:RCH) today - up 8% with an enormous volume spike:

Still a core holding of the investment club and personally now my largest UK position. I do like a volume breakout in a high ranking share on no news - and would consider buying more if it wasn't already overweight.

Stock Pitch - Reach (LON:RCH)

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

14 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...