Time to sell Emap

South Staffs looks undervalued; InTechnology: profits proper to follow

Stephen Foley
Wednesday 13 November 2002 01:00

Emap's stable of magazine titles takes up more than one shelf in the newsagent. FHM, Esquire, Smash! Hits, Trout Fisherman et al have all been going at a great gallop despite the advertising slowdown that has plunged lesser media companies into crisis. As long as the consumer continues to spend, advertisers continue to place product ads in these glossies, so revenues have been reasonable. And circulation gains have been impressive: Heat is leading the field in the UK; FHM's launch in the US has taken its sales there to 1.1 million copies a month.

Emap's cut-out-and-keep form guide in its interim results presentation yesterday showed the UK consumer division as the group favourite. The rest was mixed.

The business-to-business division includes Emap's more obscure trade magazines and business exhibitions. While recruitment and other advertising revenue has been poor in the magazines, there has been good attendance at exhibitions and operating profit is up thanks to some belt-tightening last year. In France, Emap's performance is improving after a poor period.

There was mixed news, too, in commercial radio, where Emap owns the Kiss and Magic networks. Advertising revenues have at least not got worse, but there is no real hope that things can rebound any time soon. The group is in something of a strategic bind over radio. The Communications Bill in today's Queen's Speech should unleash a wave of consolidation, and Emap insists it wants to buy other assets but thinks most are currently overvalued. That presumably goes for its own, which doesn't do much for confidence in the shares. Really, the group lacks the financial fire power to be a consolidator, so its radio strategy remains a mystery.

Emap has just 40 per cent of revenues from advertising, which is why its shares have outperformed the media sector so strongly. They now trade on 15 times the current year's earnings, which looks toppy. With falling consumer confidence set to impact advertising in the UK magazines, now is time to sell.

South Staffs looks undervalued

Being a water company is all very well, but it is not very exciting. So South Staffordshire has branched out into emergency plumbing. Finding that still not thrilling enough, it has been on an acquisition spree this year that has taken it into furniture restoration and locksmithing.

It is too early to pass judgement on these latest acquisitions, which will start to show results in the second half of South Staffs' financial year. In the first, pre-tax profits were down 7 per cent because of increased goodwill write-offs. There is progress, though, in the emergency plumbing division, Home Service, which is based on an insurance policy model. A flat annual fee covers all callouts. Organic growth from Home Service and maintenance contracting for other water companies totalled 27 per cent in the six months to 30 September. The hope is that can continue with increased cross-selling opportunities from the acquisitions.

South Staffs moved from the boring water sector of the stock market to the support services sector, just as investors were heading the other way, preferring the safety of utilities' dividends to the volatile share prices and risks of the support services companies. Its shares have also been trashed by Vivendi Environnement, the French utility which used to own 31 per cent of South Staffs and dumped the stock on the market last month. It has been unlucky, and now looks undervalued. Stripping out the asset value of the water business, a share price of 466p (up 1p) means the support services business trades on less than 11 times earnings. Hold.

InTechnology: profits proper to follow

Peter Wilkinson, who dreamt up the concept of an internet service provider called Freeserve and who has been behind a string of other tech success stories, has high hopes for InTechnology.

The company is, essentially, a data management business, offering companies hardware and software solutions to back up, and store, their data. He has long argued that, as data volumes increase, it makes sense for companies and organisations to outsource that storage process, and InTechnology's "managed data services" (MDS) arm should benefit from that trend.

The early signs are encouraging, despite the extremely difficult IT markets. Sales in the half-year to 30 September were £76m, up from £73.9m with the MDS division nigh on doubling its turnover. Better still, the company, which has around £16m cash, reckons it has increased market share and says the second half has started well.

InTechnology lost £4.7m in the first half, unless the write-down of goodwill is ignored, as it mainly is in the City. In that case, the company's earnings are positive, and profits proper should follow in the financial year after this. Given the current state of the IT market, customers are taking longer to sign orders and there are big risks to forecasts for this company, so its shares can be no more than a hold. But, up 5p to 52.5p yesterday, they are worth keeping an eye on.

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