Three-way Split May Be Best Way Out For Emap

Emap is cracking on with an auction of its three constituent parts, which if it goes according to plan will see Heat and its other magazines split off from Kiss, Magic and the company’s other radio brands, and the business publishing arm, home to Drapers, Broadcast and Nursing Times. A trio of memorandums will be issued in a few weeks, and so far, a reasonable queue has formed for all the bits of the business.

The company is deadly serious about selling, having seen its stock price stuck around £8 for five years. That is harsh, given that Emap is hardly the only struggling media stock. Look back to the beginning of 2002. Emap, on a total return basis, is one of the better performers, behind UBM and, marginally, Trinity Mirror and UTV, but in line with or ahead of the rest. On the other hand, over the past three years, Emap’s total shareholder return has been closer to relegation territory, between 15th and 18th out of a peer group of 19, if you look carefully at its annual report.

The good news is that Emap reckons that it can essentially mitigate any tax liabilities, and that its pension deficit, at £14 million, is not problematic. A cautious approach might be to assume £100 million of deal liabilities. Debts, after the already agreed sale of Emap’s Irish radio operations, meanwhile, total a modest £250 million.

On a simple basis, Emap is hoping that it can achieve around a 20 per cent premium to the prevailing 822½p, and it is bravely promising that it won’t sell if doesn’t get there. Analysts reckon that the parts are worth £2.4 billion – £1.3 billion for the business to business arm, £700 million for consumer magazines and £400 million for radio. Knock off £350 million for debt, tax and pensions, and it produces 949p a share, an upside of 15.3 per cent. Although that’s below the 20 per cent threshold, one suspects that Emap might well settle for that.

However, there is also plenty to worry about: the prevailing credit squeeze is reducing the ability of buyers to spend, although there is enough trade interest out there that may be able to take advantage of leveraged buyers’ weakness. In a series of recent auctions, such as Chrysalis Radio and Trinity Mirror’s Racing Post, the sale price has underwhelmed or been chiselled away by buyers, leaving little immediate capital gain. Emap also plans to sell each business in a block, but for its business-to-business arm in particular, buyers are likely to want to cherry-pick, which could dampen demand.

On the other hand, the target multiples look manageable. UBM, a business-to-business specialist, trades at 14.7 times historic operating profit; a £1.3 billion valuation for Emap implies 15 times. In radio, GCap Media, a pure radio concern, is valued at 24 times historic operating profit, comfortably ahead of the 14 times that a £400 million sale of Emap’s radio arm would achieve. There are no easy comparators for the magazine business, but the implied ten times multiple is not demanding.

The City has been systematically undervaluing Emap for years. It is something that a dynamic chief executive or a demerger could resolve, but that is not the road chosen. Picking over the parts should generate value from the shares’ current level. Buy.

Hiscox

Memories of Hurricane Katrina mean that there is every reason for Robert Hiscox, chairman of the £1.1 billion Lloyd’s of London insurer, to remain nervous about the present hurricane season. The profit outlook for his sector partly depends on the strength of winds in the Gulf of Mexico over the next few months.

For now, however, Hiscox is looking stormproof. First-half results yesterday showed an above-forecast 72 per cent rise in pretax profits, strong growth in written premiums, a 33 per cent increase in the dividend and minimal exposure to US sub-prime markets in its investment book. Across the group, the combined operating ratio – the most closely followed measure of an insurer’s profitability – has improved to 84.8 per cent from 94.6 per cent.

All this in a six-month period when Hiscox has faced a £25 million hit from a European windstorm, £30 million from flooding in Britain and downward pressure on insurance premium rates. Hiscox is cutting underwriting capacity for next year. It may lose some new business by opting to keep prices high but hopes that its reputation will keep customers onside.

Expected flood-related losses of £20 million in the second half mean that full-year forecasts are unlikely to rise. At 280p, the stock trades on 1.46 times its net asset value, marginally above its sector’s 1.41 median, which is about right. Hold.

Raymarine

There was something of the finger in the wind about the 2008 profit forecasts by the Portsmouth-based marine electronics specialist. Such approximation is ironic from a company that supplies precise navigational aids to amateur sailors and it was taken badly by the stock market. The shares fell 26 per cent to 264p, 46 per cent below April’s high, giving Raymarine its worst one-day performance since floating three years ago.

Yet in tipping that US sales next year were set to echo the 3 per cent fall in constant currency terms seen so far this year, the company cannot help but sound vague. Its order book stretches out only four weeks and with boat buyers in America – from where it draws 45 per cent of sales – hurt by higher interest rates and a weak housing market, caution is appropriate. With 25 per cent of the market, the Raytheon spin-off is world leader in its niche and is growing at 14 per cent in territories outside of America, where marina and waterside developments, such as those in the Middle and Far East, augur well for the long term.

At 11 times lowered 2008 earnings forecasts, the shares appear good value, but, with no further updates scheduled until December, are likely to be becalmed. Avoid.

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