Warning in the west
Recommendation
All of these factors were at work when West Australian Newspapers Holdings reported its half-year results.The outcome was pleasing, although obviously not quite pleasing enough for some investors, who immediately pushed the share price down to levels where it is now 9.8% lower than at the time of our last review in issue 36 (Accumulate - $5.82).
Further dividend
Operating profit after tax and before abnormal items for the six months to December 1999 rose 12.8% to $35.2m, partly due to a dividend of $20m from AAP Information Services, from the sale of AAPIS's interests in Vodafone and AAPT, a deal that was put together several years ago. A further dividend of $6.5m from this source is expected next year. Total revenues rose 13.8% to $188.4m, an increase of 13.8% on the same period last year. The dividend was 5 cents higher at 20 cents.
Closer scrutiny of the result though may sound a warning bell. The group's flagship newspaper, the West Australian, had a mixed half-year. Net advertising revenue may have increased 3.9% to $98.8m but this masks an uneven performance. Advertising volumes only increased by 1.0% and net circulation revenue actually fell 0.5% to $30.6m. Display ads were up by 4.5% and classifieds up by just 0.4%, while new home advertising fell by a whopping 18.6%.
Costs rising
Rupert Murdoch's The Australian has been making inroads into the West Australian's market and the dramatic plunge of new home ads reflects some economic uncertainty. But of more concern is the rise in the company's operating costs. In total they rose 2.6% to $81.2m. Newsprint costs increased by 1.4 % to $24.8m, but other costs jumped 3.2% to $56.4m. The last thing a publisher needs is the convergence of rising costs, aggressive attacks on circulation and falling ad revenues.
Challenging areas
In the past we've mentioned that the company needs to do more on the Internet to complement its dominant position in the Western Australian market, or move interstate. It's a challenging area - as demonstrated by the huge loss made by the f2 sites run by Fairfax - but it is becoming more important.
Despite these misgivings, we still find the company attractive. It's well-run (which means that management is likely to address non-newsprint cost rises) and dominant in Western Australia (it will give anyone a run for their money). So, while we think the share price has come down faster and further than it should, this only serves to improve the already attractive dividend yield, to 6.7%. In our opinion, that's all the more reason to maintain our ACCUMULATE recommendation.