Doubts over advertising make UBM too risky

Dimension Data; Dixon Motors
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The Independent Online

Unlike Pearson on Monday, United Business Media yesterday declined to provide any hints of a recovery in advertising – and it paid the price.

Full-year figures for 2001 sent the shares into an early dive, and the reason was predictable: US hi-tech advertising. By far the most important part of Lord Hollick's reshaped UBM is its "professional media" arm, of which the main part is CMP Media, which publishes subscription-only technology magazines in the US.

As the US hi-tech sector has suffered, so it has spent less on advertising. Profits at CMP Media plummeted from £101m in 2000 to just £11m last year, as revenues fell 29 per cent. Advertising income was down 40 per cent in the second half of 2001 and the group assumes it will not improve this year.

UBM argues this is a straightforward cyclical decline. However, there may be a more worrying explanation. Analysts at ABN Amro argue that the nature of technology advertising has changed and, as a result, CMP Media is in structural decline. The broker says there is anecdotal evidence that companies are switching permanently from product-specific ads, which are CMP's bread and butter, to broader brand awareness promotions, which go mostly in more general publications. In any case, it is quite possible that we will never see technology advertising returning to the heady days of 1999 and 2000.

Overall group pre-tax profit for continuing businesses halved to £81.1m, before £500m of exceptional charges. PR Newswire, UBM's distribution service for company announcements, also demonstrated its cyclicality in the second half of 2001, with full year profits down 14 per cent.

UBM deserves credit for getting out of what is calls "consumer media" at the top of the market in 2000, selling its ITV franchises and Express Newspapers, and it returned £1.25bn to shareholders last year. However, given the technology advertising outlook, its chosen strategy looks risky. Trading on 34 times 2002 earnings, the stock is overvalued. Sell.

Dimension Data

Another day, another downgrade. Dimension Data, the South African IT supplier, told the market yesterday that its forecasts for the current financial year have to come down again, as sluggish demand continues to push selling prices lower across the group.

The shares soared. It could have been so much worse. In the end, gross margins will be about 0.5 percentage points below previous guidance. That means margins are 22.1 per cent, not 22.6 per cent, or, more starkly, earnings before interest and tax will be an estimated 10 per cent lower than previously expected.

Despite the company's talk of "pockets of activity in North America", it also means that there is no sight of the end of the tunnel. After recent savage cost-cutting, Didata says it could absorb a 25 per cent increase in revenues without having to increase overheads, so investors certain of a swift recovery in IT spending will find it an attractive play. But there are reasons to be cautious.

The group is in the process of a difficult transition from simple hardware reseller to IT consultant specialising in systems integration and e-business solutions. Acquisitions in this endeavour so far have failed to inspire. Proxicom, the US group bought for £260m last spring, was one of the worst culprits in the decline in margins.

Up 5.25p to 70.75p, the stock should be avoided.

Dixon Motors

Junction 6 on the M18 is possibly the most exciting place in Britain – if you are Peter Dixon, chief executive of Dixon Motors. It is at junction 6, within a few miles of most of the country's most important motorways, that Dixon has set up its central car distribution centre. All the new and used cars to be sold through its network of dealerships will pass through the centre for their pre-sale checks, freeing up time and space at the showrooms for additional after-sales services.

Which is why Dixon saw superb growth in profits from the new cars business in 2001. It more than offset a disappointing end to the year for motorbike sales. Dixon is the biggest motorcycle seller in the country, but has suffered in recent months as the administrators sold stock from two bankrupt rivals at knock-down prices.

Overall, group profits were £10.7m in 2001, up 42 per cent. Dixon's broker is predicting £15m this year, putting the stock – up a ha'penny at 210.5p – on barely 7 times earnings.

That is too cheap for a well-managed company in a buoyant market and with some innovative future plans. The distribution centre allows Dixon to supply, its fast-growing internet venture with Direct Line, which took 1,100 orders in January alone. And it could also enable the group to supply new entrants to the car market, such as supermarkets, who may be tempted in by this year's shake-up of the European competition rules. Buy.