Independent shareholders seem set for period of profit and dividend growth

As well as reporting and commenting on the news, media groups very often find that they become newsworthy in their own right.

BSkyB was recently in the news as it stirred up the ire of British institutional investors due to its insistence on elevating Mr James Murdoch to the key chief executive role. James is of course the son of Sir Rupert Murdoch who runs the entire group and who holds a very large equity stake in the extensive business empire of global media interests.

More recently, Hollinger International, the publishing group chaired by Lord Black, has been catapulted into the spotlight due to disclosures regarding unauthorised or misrepresented payments to management amounting to $32.2 million (€27.3 million).

Lord Black was forced to resign his role as chief executive although he retains his role as chairman. The Hollinger Group controls the Telegraph Group in Britain and the Chicago Sun Times in the United States.

An interesting feature of the global media business is that management and ownership of many media groups is often concentrated in the hands of dominant families and/or powerful and charismatic personalities. One can only speculate on why this is the case but it is certainly something that leads to added spice in the business coverage of the sector.

The only quoted media group on the Irish Stock Exchange is Independent News & Media (INM), where the dominant personality is Sir Anthony O'Reilly.

The Irish public knows INM mainly thanks to its widely read daily and Sunday newspapers. However, the group is truly international with extensive interests in the UK, South Africa and Australasia.

Only about one-third of INM's trading profits is generated in Ireland, with Australasia contributing roughly one-half of total trading profits. APN News and Media, INM's 40 per cent-owned subsidiary has extensive media interests in Australia and New Zealand, including national and regional newspaper titles, radio interests and outdoor advertising activities.

In the UK, the company's flagship title is its namesake the Independent. Quality newspapers in the UK have been having a difficult time. The company has recently launched a compact edition of the Independent. This has the same content as the broadsheet but is printed in tabloid size.

The new "compact" edition is being sold side by side with the original broadsheet edition. The launch has been successful and it is hoped that it will lead to a permanent increase in total sales of the title.

After a period of under-performance, INM's share price has staged a sharp recovery over the past year when it has out-performed the ISEQ Overall index by more than 40 per cent.

A key factor that cast a long shadow over the shares in recent years has been the very high debt on the company's balance sheet. However, earlier this year the company embarked on a recapitalisation programme to reduce debt through both the issue of new equity and asset disposals. This process has now been broadly completed and the balance sheet is now on a much firmer footing.

High debt levels imply a high degree of financial risk and this probably explains why INM's shares are trading on a price-earnings ratio (PER) at the lower end of the range for its peer group of companies (see table).

For example, INM's PER for 2003 is forecast at 14.6 compared with a PER of 16.9 for its 40 per cent-owned subsidiary APN, although it is in line with the PER of Trinity Mirror in the UK.

Now that the recapitalisation process is almost complete the outlook for the shares depends on the outlook for the company's underlying businesses.

According to most forecasts, the Irish economy is now picking up speed and this should lead to growth in advertising spending. In the Southern hemisphere, APN issued a trading statement at the end of October that was positive regarding trading conditions in Australia and New Zealand.

The UK remains problematic but a successful turnaround of the Independent title would quickly feed through to INM's bottom line.

On balance the signs are that shareholders in INM can look forward to a period of steady growth in earnings and profits for the foreseeable future.

The main area of uncertainty lies in the possibility that the company may embark on a major acquisition.

Given the historical acquisitive propensity of the group, such a development is a real possibility but shareholders would need a lot of persuasion to convince them that another large-scale acquisition would be in their best interests at this time.