January 13, 2015 / 7:11 AM / 5 years ago

Fitch Affirms DMGT at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, January 13 (Fitch) Fitch Ratings has affirmed UK-based Daily Mail and General Trust's (DMGT) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable. The affirmation reflects the effective transition DMGT is making within its business mix, on-going structural declines in its national newspaper business and a measured financial policy which targets leverage at 2.0x EBITDA. A disciplined programme of acquisitions and divestments over the past five years has supported the group in improving its business mix, growth prospects and reduce leverage. Funds from operations (FFO) adjusted net leverage of 2.4x at YE September 2014, is expected to increase over the short term as a result of further share buy backs and short-term margin contraction in some divisions. However, Fitch expects the increase in leverage will remain commensurate with the rating, assuming a limited amount of M&A. KEY RATING DRIVERS Effective Change in Business Mix DMGT has effectively transitioned its business model to have a lower dependence on its national newspaper business which is subject to on-going structural declines. The group is now exhibiting a balanced mix of revenue type and geography. The change in business mix reflects a greater proportion of revenues based on recurring subscriptions with lower cyclical exposure and an increase in the proportion of revenues from digital sources, which are likely to be competitively stronger relative to print. The process is on-going, with investment in technology and platforms set to continue. At the end of September 2014, the UK accounted for 53% of revenues and the B2B segment accounted for 73% of operating profits (excluding corporate costs). This compares with 74% and 35% in 2007, respectively. Revenues from subscriptions-based sources accounted for 28% of total revenues. dmg-Media Managing Structural Decline DMGT has made significant progress in managing the structural decline in its newspaper division, which is being driven by a shift from print to digital in the way content is accessed and distributed. This is impacting DMGT's revenues from print advertising and circulation, which have declined by 28% over the past five years. Cost reductions have enabled the division's margins to expand to 12.0% from 8.6% and digital advertising revenues have more than doubled to account for 17% over the same period. Despite the improvement, we expect print and circulation revenues will continue to decline. While growth in online revenues has been strong, the product is still in a growth phase with limited visibility of medium- to long-term profitability. Active Portfolio Management Acquisitions and divestments have played a central role in the company's strategy to grow its digital business and diversify internationally. Between YE September 2009 and 2014, DMGT made GBP481m of acquisitions and GBP692m of disposals helping to deleverage. We expect the use of inorganic levers to continue, particularly as a means of leveraging growth markets, client databases, brands and digital media. DMGT's disciplined approach to M&A has recently been successful. However, it is not without risk, particularly if deployed outside existing business lines. The approach also makes it more difficult to envisage the nature of DMGT's core, long-term business portfolio. Short-term Margin Contraction It is likely that EBITA margins for RMS and dmg-Media may weaken in the short term as a result of delays in the launch of RMS One and the move from biannual to annual events in dmg-Media. Fitch expects margins to recover within two to three years as RMS One is launched in 2016 and the change in event formats have been made. Measured Financial Policy DMGT has seen improved leverage as result of increasing EBITDA and asset sales. At FY September 2014, net debt to EBITDA was 1.5x, below management's public target of 2.0x. Management estimates headroom of around GBP250m for capital allocation while keeping within this target. Fitch expects the company will maintain leverage with M&A and an on-going share buy-back programme, which accounted for GBP112m of cash outflows in FY14, completing the GBP100m buy back announced in November 2012. A further GBP100m buy-back programme was announced in September 2014 and is on-going. The company has also repurchased a portion of bonds, which will reduce future finance charges, shifting towards comparatively cheaper bank loan financing which attracts lower interest than the comparatively expensive bonds. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - FFO net leverage persistently trending above 3.5x, a metric that Fitch expects to correlate approximately to 2.7x net debt to EBITDA. While allowing considerable headroom versus the company's stated (2.0x) leverage target, payments to the pension fund have in the past inflated the FFO net adjusted metric (3.2x at YE12 for instance). Net debt to EBITDA deteriorating materially above the company's 2.0x target purely from operational weakness would also create risk. - A declining print news industry makes the consumer transition to online important. Weakening consumer earnings trends could also prompt negative action. Fitch will also monitor the execution risk in major B2B project roll-outs. Positive: An upgrade would only be possible once greater clarity and success of the digital transition in consumer has been established and businesses like RMS in B2B have proven the revenue (and margin) potential of its new platform roll-out. Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014 is available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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