Emap rides the ad cycle with skill

Investment Column
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The Independent Online
Publishing magazines like Your Cat and papers such as the Ampthill & Flitwick Times may not be most people's idea of the glamorous world of the media, but, as Emap has found, it doesn't half bring in the profits when the advertising cycle is moving in the right direction.

Advertisers like being able to hit their target audience precisely, readers like the focus on whatever it is they're interested in, and technological advances mean new titles can be tested at little expense. There's no need to tie up huge amounts of capital and the industry's profits have an enviable ability to pass straight through into free cash-flow.

Emap is currently operating in a pretty benign environment. Advertising is on a roll across the board, from consumer magazines to business publications, local newspapers and local radio. And unlike the cut-throat national newspaper business, cover price rises continue to outstrip inflation.

That, and the benefit of a pounds 250m shopping spree over the past year, helped pre-tax profits rise 40 per cent to pounds 63.9m, with an encouraging 22 per cent rise in underlying profits. Earnings per share of 22.2p were a third better than last year and allowed a 14 per cent dividend increase to 9.75p.

Emap has an impressive record. When others were paying silly prices in the boom years, it stuck to what it knew best - launching new titles. When some of its competitors came unstuck, it was in a strong enough financial condition to make a string of well-timed moves, including a successful step into radio just as the industry finally started taking the share of advertising it had always claimed it could but had failed to deliver.

Local radio has traditionally only managed to secure about 2 per cent of display advertising, compared with much bigger slices of the cake in Europe and especially America. The recent proliferation of stations and more sophisticated selling of the medium have, however, taken UK radio's share up to almost 4 per cent and rising.

Elsewhere, moving into a loss-making French consumer publisher and achieving operating margins of 5 per cent on the way to promised double-digit returns also seems to be a well executed diversification, and despite last year's heavy capital expenditure, borrowings are still a manageable pounds 134m with interest covered 11 times.

Emap's management reckons it has a couple more years of growth in the current ad cycle, although the rate will inevitably slow from last year's exceptional levels. If the higher prices papers are now able to charge for advertising make up for the short-term impact of still-rising pulp prices, it is probably right.

Emap's shares have had a good run, as befits a company that can boast 20 per cent compound growth in both earnings and dividends over the past 10 years. Since early 1991, the shares have almost tripled to yesterday's 460p, up 3p.

At that level, however, they stand on a forward price/earnings ratio of 17, a hefty premium to the rest of the market. At this stage in the advertising cycle, and with cost pressures persisting, that is high enough.