Another useful video from PI World, this time featuring Andy Brough (AB) and Richard Leonard (RL).
RL talks about Reach (RCH) at 21m15s and mentions its ‘P/E of 3’.
Sure enough, SharePad shows a trailing P/E of 3 and the shares having traded on a single-digit multiple for at least 10 years:
The cheap rating was mentioned briefly in the video as being due to the ‘legacy’ print business and a pension deficit. Reach used to be known as Trinity Mirror and owns a number of national and local newspapers.
The pension situation is interesting. I have always viewed final-salary pension schemes as financial ‘black holes’ — they always seem to absorb more and more cash to the detriment of cash flow for shareholders.
Some extracts from the 2019 RCH annual report: https://www.reachplc.com/static-files/4af444f5-7bd1-4bd8-a533-0fb65867b208
First, confirmation of a £296m accounting scheme deficit:
Next we discover scheme assets of £2.4b are required to pay annual benefits of £112m. The 4.7% required investment return is relatively high (at least according to my study):
This note reveals scheme benefit payments will rise until 2031:
While this note reveals scheme benefit payments will continue beyond 2045:
Those dates suggest the scheme could be a burden for shareholders for some time.
This is the critical pension note:
RCH is on the hook to pay deficit contributions of between £53m and £56m per annum between 2021 and 2027. I calculate the total obligation comes to £386m.
Importantly, these deficit contributions (due to accounting reasons) are not charged to earnings but are of course revealed in the cash flow statement:
As such, calculating RCH’s P/E using reported earnings seems very optimistic to me given the obligation to pay £386m from those earnings into the pension scheme.
This chart from the results powerpoint indicates last year’s £49m deficit contribution consumed 37% of the total £133m cash flow:
If you wish to value RCH by its reported earnings, the £386m deficit-contribution obligation really needs to be added the market cap as that clears the pension worries (at least until 2027) and reported earnings then all flow to shareholders.
RCH’s market cap stated by RL in the video was £240m, so adding £386m gives £626m. If the P/E was 3 at £240m, then it is almost 8 at £626m. Still single-digit, but perhaps not offering the upside potential of a true 3x multiple share.
The annual report also reveals RCH has a £21m provision to settle claims related to phone-hacking:
These claims have been a notable source of exceptional items for RCH during recent years, and their regularity suggests the likelihood of RCH eventually paying these claims will be high. Arguably the market cap should be adjusted to include a phone-hacking obligation as well.