DMGT looks forward with multimedia skills

The Investment Column
Family-controlled companies can be either terrific or atrocious, but Daily Mail & General Trust very definitely falls into the former category. It owns the Cadillacs of the mid-market national newspaper market with the Daily Mail and its sister title the Mail on Sunday and has a brilliant range of regional newspapers grouped under the Northcliffe subsidiary.

But there is a big price to pay to reach and maintain market dominance in the cut-throat newspaper market. That much was made painfully clear yesterday, when DMGT disappointed the City with flat interim earnings and a warning of continuing tough conditions for the bulk of 1996. The shares slumped 62p to pounds 14.78.

There were two culprits in the Mail's case. The first was unavoidable, and has affected all newspaper groups: high newsprint costs. These charged ahead by 28 per cent year-on-year, and will affect profits through the next six months, although costs look set to moderate at last.

The other was voluntary. DMGT has made a conscious decision to build its brands, and has spent freely - perhaps pounds 7m - to do so. With reinvigorated competition from the struggling Express group following its parent's merger with Lord Hollick's MAI, the Mail has resolutely courted new readers. The costs of wooing former customers of Today were especially high.

A few investors were clearly spooked by the flattish pre-tax profit figure of pounds 41m in the six months to May, which was way below analysts' estimates. But the mood among City followers was more relaxed.

While analysts were busy lowering their estimates for the current year, the future actually looks quite bright. The high promotional spend has obviously brought in readers, although it has yet to bring much increase in advertising revenues. But this is bound to happen. As a result, 1997 is likely to look robust.

DMGT has also cleverly extended its marketing and promotional skills into other media, not least its successful Euromoney publications; a 17 per cent share in ITV company Westcountry; a stake in Teletext; a slew of radio investments and the embyronic network of local television stations known as Channel One. The future of newspapers is obviously in doubt - indeed, the business has been in gentle decline for years - and DMGT's investments in radio and television will be a welcome addition to the bottom line within a few years. If Channel One actually takes off - and the jury is definitely still out - then the company will have found its new cash cow.

In the interim, full-year profits, now expected to be around pounds 90m, put the shares on a pricey multiple of 26 times expected earnings. But that could fall to 17 in the following year. Hold.