Future Plc (OTC:FRNWF) is a British media company headquartered in Bath, England. The company publicizes 50 magazines but also has a digital publishing business, which has more than offset the poor performance seen in physical magazine sales.
I believe Future Plc has a strong market position, with a prominent history of delivering shareholder returns. However, following this large run-up, I believe the company is fairly priced at current levels.
Pre-close trading update
The company provided a short but sweet pre-close trading update that saw shares rise 16% in Monday morning trading. The trading update outlined that the company believes full-year adjusted operating profit will be materially ahead of the current market expectations. The fact that Future Plc has come to the market to make it aware they will beat expectations does give an idea about how good the numbers are actually going to be. Due to no specific figure being given, it is difficult to quantify what the adjusted profit will be. However, the update did give an idea about the growth experienced in the digital segment of their business. For August, organic unique visitors in the UK and US were up by 25% and 40%, respectively, compared to last year. This has massively helped to mitigate the effects seen in the physical magazine business.
Currently forecasted adjusted profit for the year is £78.2 million to £83.2 million. After today’s trading statement and the subsequent share price move, the market now believes that this adjusted profit will be 16% higher to around £90 million. I do believe that Future Plc will actually report a higher profit than this for the full year, primarily because the digital growth seen will be so sizable. In the first half, Future Plc reported an adjusted operating profit of £40 million. It was then forecasted that a similar operating profit would be delivered in H2 – but the accelerated digital shift has changed that. The far greater traction the company’s digital publications have been getting has driven user growth. The company monetizes this traction through a number of revenue streams. These include eCommerce, events, digital advertising, lead generation, email marketing, and video production. The company also taps into a broad audience in many industries such as ‘photography’ and ‘hobbies’. Whilst advertising, in general, has experienced ‘softness’, strong audience growth has offset this. As unique visitors have surged 25-40%, digital advertising and e-commerce sales will also subsequently surge. These were the main drivers of the 77% profit growth seen in H1. Overall, I believe the adjusted profit for the full year will be closer to the £100 million than £90 million. This will be driven through a continued surge in off-platform advertising, which was responsible for just 8% of the revenue in H1, I believe the revenue contribution from this division will sizably increase due to the increase in site traffic across the web. This also includes social media where Future Plc already has a strong presence.
Acquisition growth strategy
Future Plc has a long history of using acquisitions to help deliver growth. Back in October 2019, the company announced the acquisition of TI media, which was completed in April of this year. For the majority of companies, such as that of Cineworld (OTC:CNWGY), the thought of completing sizeable acquisitions in this current environment comes as a bit of a nightmare, but for Future Plc, this isn’t true. Due to the focus of the acquisition being on their growing digital business which has gained greater traction in the current environment, the acquisition has gone ahead with no real hiccups. In fact, Future Plc is happy to complete the acquisition of TI media in order to expand the digital reach in a currently fast-growing market.
Future Plc has already acted quickly to integrate TI Media into its operations as previously expected. The group said in the latest trading update that this integration remains ‘on track’. Given how turbulent the period is and that the company will be working through this process through mobile working, credit must be given to the company for still making strong progress in this area. Future Plc even highlighted that the performance of TI media was better than expected in the second half. This shows that the acquisition couldn’t have come at a better time as the price paid for TI Media last year will most likely be less than its worth in the current environment. Future Plc commented in the acquisition press release about what TI Media would offer:
The TI Media acquisition continues to offer a compelling strategic and financial rationale, with entry into new market verticals through its leading brands, and expansion within existing markets. Leveraging Future’s proprietary technology platform and global operating model, we remain excited about the long term opportunity.
Future Plc has already outlined that a number of cost synergies have been secured which amount to £10 million following the acquisition – £3 million of this will further boost FY20 results. Future Plc believes cost synergies will come in at a significant £20 million per annum ahead of the forecasted £15 million. Sometimes, large businesses can fall into the trap of entering reckless acquisition. However, it’s clear already that this is not the case with Future Plc. The company has a history of implementing acquisitions well into its core position and further delivering on its growth strategy. The cost synergies will significantly benefit Future Plc’s profitability over the years to come.
There is no denying the fact that Future Plc has performed exceptionally well this year looking to report adjusted profit growth of more than 80% for the full year. However, even after this growth, due to the large rise in share price seen over the last few years, I believe Future Plc is now fairly priced. Even if Future Plc were able to significantly beat market expectations and deliver an adjusted profit of £100 million for the year, at current prices, they would be trading on a P/E of around 16. While this isn’t significantly overvalued, I still believe shares are fully-priced at current prices. If Future Plc were able to deliver profitability greater than £100 million, then I would, of course, have to reassess this thesis. I don’t believe the current valuation completely prices in the uncertainty that is facing the company over the medium term in terms of the physical magazine sales. There are also risks associated with the broader economic environment and the sustainability of the current traction the company is getting on its digital segment. The company may struggle to see this growth sustained.
The broader digital ‘shift’ has benefited Future Plc massively. The company has seen huge user growth statistics in August alone, which means the company believes it will deliver full-year results ‘materially’ ahead of market expectations. Due to the subsequent 14% surge in the share price, I believe shares are now fairly priced. The company could well exceed my expectations, but this chance is also balanced out by the risk that the company’s digital growth rate doesn’t sustain over the medium term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.