7:59 cut – RCH, RGD

Reach (RCH) – Trading Statement

Yesterday’s dip in the share price of the former Trinity Mirror business does not augur well for today’s trading statement. The company usually updates in mid October and it is now seems likely that they were delaying because trading was more or less in-line and they were awaiting to be able to report something concrete about the discussions to purchase the former Johnson Press titles.

So the big news today is that the acquisition is off and given that the share price jumped when rumours first surfaced that it was on, it would be logical to expect a fall today. However I suspect the share price will rise:

• There was clearly a leak yesterday and so the negative reaction may already be in the share price.
• Investors seem to be split between worrying about the structural decline in their legacy print business and about their high debt levels. With the deal off the medium term looks less assured, but worries over debt have disappeared. This should please some investors although their pension deficit remains.
• Digital growth appears to be accelerating and this growth, digital’s increased size, and some slowing of print declines has led to overall like-for-like falls abating.
• In general, trading updates and results often provide a trigger for investors to reassess companies on their merits and on this basis it is my belief that Reach holds up well.

Real Good Food (RGD) – H1 Results

With an eye-watering debit to EBITDA multiple, a large pension scheme deficit and their recent growth driver now reported as having reached capacity, the view must be one of uncertainty over whether the equity has any value.

However, the Food Ingredients business has grown significantly through the period and so the profit run-rate for this segment is likely much higher than the reported figures suggest. It is also implicit that even if they do not wish / feel able to invest in increased capacity then at least there should be positive pressure on margins.

The Cake Decoration business has also received significant investment recently and could be on the cusp of a return to growth.

Overall, the equity clearly has some option value, and the debt (having priority over the pension deficit) could reasonably be valued at par given the high interest rates and redemption premia.