Trading The Trend: Reach Plc

27th Jan '20 by Michael Taylor

10 comments 2891 reads

I first heard of Reach plc at the first Mello of 2019 from Peter Higgins (known as @conkers3 on Twitter). I’m also aware of Peter’s knack for picking out future winners, and so I set an alert for the stock to break out.

I’ve been long since last July when my alert triggered, and whilst the stock has had a sharp pullback, for now the trend continues.

It’s often worth following successful stockpickers and see what they’re buying – if they’re going to do all the hard work and research to qualify a stock for quality then I’m happy to piggyback those ideas for a trade.

Background

Reach is the old Trinity Mirror (TNI), which is both a national and regional news publisher. Like Future plc, it is making the transition to digital based content rather than relying on print.

I would also like it if the price action would mirror that of Future, as the trend here has been exceptional for shareholders.

Finding stage two trends like this, and riding them up, is one of my core strategies. It’s great to capture quick gains and book the profits, but if we want to really capture multiples of our R then the best way is to get on board trends and try to stay in the trade.

We can do this by averaging up and doubling our position. Of course, if we do this we then need to halve our stop if we wish to keep our risk constant. By doing this, we add on double the upside for the same amount of risk. Getting into positions like these tips the odds over time in our favour.

Transition to digital

Reach plc’s overall revenue is declining, however, print sales are falling slower in percentage terms, with digital sales growing and accelerating. This can be seen in the recent update where print fell 7.3% compared to its previous comparator of a fall of 8.2%, and digital grew 14.0% against the prior year of 9.3%. In my opinion, the data is not useful enough to show any real trend in print – but print is the boring and declining part, and digital is the growing and exciting revenue stream. The upside in digital – should management execute – is substantial. …

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sady

27th Jan '20

New to Stockopedia ,still trying to understand the terms used.

FREng

@Sadiaysuf

Many of the terms used on StockReports have definitions that pop up when you click on the term.

If there are other terms that you would like explained, and the explanations you find on the Internet don't help, try asking other subscribers in the comment section that is under the Small Cap Value Report each day. Stocko subscribers are usually very generous in sharing their knowledge and experience, so don't be afraid to ask.

AnonymousUser226237

Excellent article Michael!

Michael Taylor

28th Jan '20

Thank you blondeamon!

Sadia - happy to explain some of the terms used, and I would second FREng's comment about Stocko subscribers.

I've had the pleasure of meeting many of them in person and speaking to different people has certainly helped steepen my learning curve.

Jack Brumby

29th Jan '20

Interesting addition to the series Michael... I did actually take a surface look at Reach (LON:RCH) a couple of weeks ago. There was a bit too much going on under the surface for me to unpack it all in time for an article but I left it feeling that it is probably cheap. Good yield, paying down debt, generates cash, etc.

It has a pension fund, which is an additional point to be aware of. If you are trading this share rather than investing in it maybe this is less important? The situation for most pension funds has improved slightly over the past few years.

Propertius

30th Jan '20

Sales are still falling: -4% YoY in 2019.
The IAS pension deficit at H1/19 was £350m, roughly the same as the stated EV.
Digital sales are only growing 14%. Digital is only 14-15% of total sales.
Digital would appear underinvested.
Margins have been stable despite revenue declines from cost cutting.

The H1 report explains the extent of the claim on cashflows by the pension: Group contributions to the defined benefit pension schemes in the first half were £24.5 million (2018: £65.6 million including a contribution of £41.2 million to the Express & Star schemes relating to the acquisition). Contributions have been agreed at £48.9 million per annum for 2019 and 2020, £56.1 million per annum for 2021 to 2023, £55.3 million per annum for 2024 to 2026 and £53.3 million for 2027.

In H1/19 the business generated £70mm of operating cashflow. And £140m for FY/18. Assume £140m FY/19. Take off normalized cash taxes, interest, normalized capex & that leaves c.£90m. Meet the pension commitments above, and there is £35m left on a £400m of market cap. All assumptions.

Q1: Is there more cost to take out from the merged papers?
Q2: When do cost savings run out?
Q3: Will the revenue decline in Print accelerate or start to decelerate?
Q4: Can they succeed in digital?

In return the FCF yield is c.8-9% of which some is coming back to shareholders as a dividend.

xcity

It is best to see it as a very large pension fund deficit with a declining business attached.
So far, they have been very good at managing the decline, reducing costs and buying new businesses at a reasonable price. Cash flow is very high.
There's a possibility that the pension fund deficit will disappear (paying deficit down, interest rates may rise, members aging, life expectancy has recently fallen). There's a possibility the papers profitability will fall more slowly. Naturally there's also the possibility of the reverse. Digital growth is encouraging; there may be a saleable asset when the game ends. Overall valuation critically depends, short-medium term, on pension fund prospects. And every sizable business they buy at a decent price adds a few years before we reach full time.
My summary is - well managed small dog with huge tail.

PS I do hold. Standing at a very good profit as well as a good yield.

Gromley

I love that characterisation xcity, it pithily sums up the pros and cons here.

As someone who has been banging the drum on this for some time I have a few bits of extra fill in.

As Propertius summarises they are currently throwing off sufficient cash to fund all of their obligations, including a commitment to healthy dividends to shareholders and still have cash left.

I have tended to be sceptical of the digital business and my initial investment hypothesis was to value it at zero and I still came to the conclusion that the "dieing legacy business" would throw off more than enough cash before it breathed its last to justify the share-price.

However, I have been pleasantly surprised that digital looks like it is actually worth something.

Propertius asks "Can they succeed in digital?"

Well, the short answer is - THEY HAVE.

I cannot immediately recall the source, but across their numerous websites they are the 5th most browsed entity from UK residents - behind Facebook, Google, Amazon & Microsoft - so the biggest home-soil presence, beating even the BBC. Of course if all of the editorial costs were ascribed only to digital it would almost certainly still be "pre-profitability", but I am warming to the idea that they can generate sustainable profits from digital.

I will have a further trawl though this when we get the full results so I don't want to get too bullish, but I personally see Reach (LON:RCH) as still significantly under-valued.

2nd Feb '20

Thanks Jack - in all honesty the pension fund doesn't bother me. My opinion (rightly or wrongly) is that if it was a huge problem the market would not be re-rating this share.

That said, markets can be wrong, and I can certainly be wrong on my optimistic view of this stock. However, a stop loss on the position ensures that if the market decides that it is a problem suddenly and the price reverses then I will be relieved of my Reach position.

I believe there is also an amount of money set aside for the phone hacking scandals.

Trading the Trend: Reach plc

Background

Transition to digital

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About the Author

Michael Taylor

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