Johnston Press investor document forecasts 2017 operating profit growth driven by ads and more cost cuts

Liberum report for JP predicts year-on-year operating profit growth next year
Potential investors told: 'Johnston Press management are experts at taking costs out of the business'
Further consolidation in regional press 'could be potentially very interesting'
Political positives: Government sees regional press as important, regulators 'relaxed' about consolidation, BBC set to be 'reined in'
Target audience: 'Middle-income families that are economically resilient'

A report promoting Johnston Press to potential investors boasts of the publisher's ability to further cut costs.

The Liberum report, seen by Press Gazette, says: "Johnston Press management are experts at taking costs out of the business."

The document, circulated to staff, has been produced after Press Gazette research found last week that the company has shed more than 1,000 journalists since 2009, halving its editorial headcount. Staff were told it had been produced by Liberum, which was described as one of the company's "joint corporate advisers".

Liberum forecasts Johnston Press's operating profit will begin to grow in 2017. In 2014, its operating profit was £55.5m. Last year's figure is expected to be down 10.2 per cent to £49.9m and this year's down 4.8 per cent to £47.5m. But Liberum forecasts a 2.4 per cent growth to £48.6m in 2017.

This is predicted to conicide with year-on-year advertising revenue growth in 2017, up from £141m this year to £143.4m. In 2014, this figure was £165.7m.

Liberum also suggested total operating costs will have fallen from £210.4m in 2014 to £176.9m in 2017. This figure was more than £350m in 2009.

The report also suggested there could be further consolidation in the regional press industry after Trinity Mirror took charge of Local World last year. Author Ian Whittaker, of Liberum, said this "could be potentially very interesting for Johnston Press".

Cost-cutting

On cost cutting, Whittaker said: "Johnston Press management are experts at taking costs out of the business. Consider this: from 2009 to 2014, total revenues (including the impact of closures and disposals) fell c. £158m but total operating costs fell c. £144m i.e. over 90% of the revenue reduction was offset by a reduction in costs.

"Crucially, further cost savings are planned for 2016 while the group has continued to invest in digital. With nearly £200m of operating costs, the majority of which is labour (our estimates are between 50% and 55% of total costs), if the group needed to make further cost reductions to grow its margins, it could do."

The report went on: "Crucially, more remains to be cut and the management’s determination to rightsize the cost base to reflect the revenue declines remains undiminished. Johnston Press still employs around 3,000 people and earlier this month, management announced more plans to reduce costs… Our view is that, from FY15E to FY17E, there will be a further c.£16m reduction in costs, which will mitigate the c.£18m expected reduction in revenues, allowing the group's margins to reach 25% in 2017E."

Political situation

Whittaker also highlighted several political factors that make Johnston Press an attractive proposition.

He noted that the Government "has made it clear that it sees the regional publishers as an important part of its local devolution plans and in holding local government to account and has taken steps to help the regional publishers by steps such as relief on business rates and ensuring that public notices continue in print".

He also said there appears to be a "more relaxed attitude to consolidation in the regional publishing space", citing Trinity Mirror's Local World acquisition.

Whittaker said: "The regulator and political sphere’s opinion about regional press has become more supportive in recent months.

"While we are positive on Johnston Press from a standalone perspective, there is no doubt that further consolidation in the regional publishing space could see significant upside in terms of synergies."

And Whittaker also highlighting the potential "reining in of the BBC".

The report said: "The regional publishers have complained for years of what they see as the detrimental impact of the BBC’s free online material on their own revenues and the fact the BBC piggybacks off the regional publishers' content.

"There are signs that the government wants the BBC to scale back some of its impact on the regional publishers… Therefore the renewal of the BBC Royal Charter in 2016 offers the opportunity to address some of these concerns and there are signs the BBC is willing to give ground to deflect unwanted political attention. For example, the BBC has suggested commissioning court and council news from local press, and pay for the content."

Advertising

Predicting year-on-year advertising growth in 2017, the report praises the 1XL advertising platform launched by Johnston Press, Local World and Newsquest in 2014.

Whittaker noted that the platform offers "reach and scale" through 1,000 local newspapers and claims a web audience reach comparable with the Mail, Guardian and Telegraph websites. He also highlighted the "trust" readers have in the local media.

The report suggested that native advertising and "greater penetration amongst" small and medium businesses could be important in the future.

On small and medium enterprises (SMEs), it said: "We estimate that Johnston Press currently only works with 10%-15% of regional SMEs hence the market opportunity is huge (note we think this is similar to other regional newspaper groups such as Local World).

"Website building, assistance in Google search and advertising are among the opportunities that regional publishers can embrace with SMEs. This could be another big opportunity of growth for Johnston Press – and one that is unlikely to be forecasted into numbers."

Focus

Johnston Press has, the report said, "re-focused… to concentrate its investments and attention on two areas – 'Primary' and 'Core'".

The primary areas, described as "the gems of Johnston Press" where investment will be focused, are in "the good number of mid-sized market towns and cities, which are economically resilient and not too competitive. Its focus is the Harrogates, the Leeds and the Edinburghs of the UK".

It added: "By demographic, it sees the biggest opportunities are in middle-income families that are economically resilient… By type of advertising, its focus is on higher-margin display and areas which have not already been structurally challenged (i.e. classifieds such as motors, jobs and property)."

The core assets "are those which the company will look to exit and / or run for cash, and which are non-vital to the group". They are defined by areas "that either sit out of its geographical scope, are struggling economically or are too small to support a viable newspaper business".

The report said: "Interestingly, it views millennials – the darling of the media elite from an advertising agency’s standpoint – as not sufficiently attractive as they lack spending power."

Whittaker wrote: "It is this view that drives Johnston Press’ view of a 'lock' of attractive assets that runs diagonally from SE England through the Midlands and the North to the mid-belt of Scotland.

"Note there are assets that sit outside its proposed focus area which appear attractive – we see these as assets that are likely to be sold to regional newspaper peers that have greater scale in these areas.

"The obvious benefit for Johnston Press from this is that they will raise cash via the disposals. This geographical scope should ensure that the group maintains the bulk of its most profitable assets, given their current profile."

Picture from report gives indication of Johnston Press's geographical strategy

Topics in this article : Johnston Press