7:59 cut – RCH

Reach (RCH) – H2 2019 Results

Reach, previously Trinity Mirror, is the largest owner of UK regional newspapers as well as the Mirror and Daily Star. Over many years they have been producing strong free cashflows despite structural declines in physical circulation and in particular classified advertising, and acting as a consolidator of failing competitors.

Their debt levels go in cycles as they borrow to buy up competitors and then relatively quickly pay back the debt before embarking on another purchase. Last week there were rumours of, and a confirmation of interest in, them buying the former Johnston Group newspaper group, something they were not in a position to do at the time of Johnston’s original collapse due to high debt levels.

Today’s results are inline with my expectations. Again there is a pleasing reduction in net debt despite large dividend and pension payments. Although net debt is now only £12.9m (and likely approaching zero at this point in H2), they clearly disclose an additional £59.0m of deferred consideration (£18.9m due in February 2020) and a £348.2m IAS18 pension deficit. If these amounts are all treated as debt then the EV/cashflow looks much less appealing than the headline figures.

I bought in at around 60p, taking advantage of the market slump at the end of last year, and have received 3.77p of dividends. The pension situation and outlook has since worsened due to interest rates that are falling globally once again. My position has now become outsized given the considerable risks and the upside has reduced. Therefore I intend to reduce my holding today.