March 24, 2017 / 11:30 AM / 4 months ago

Fitch Affirms UK's DMGT at 'BBB-'; Outlook Stable

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(The following statement was released by the rating agency) LONDON, March 24 (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. DMGT's rating reflects a balance between a portfolio of cash generative business-to-business (B2B) assets that are exposed to growth markets, a sizeable exposure to print advertising and circulation at the company's dmg media division that are in structural decline and a measured financial policy that retains financial flexibility. The deconsolidation of Euromoney has increased the company's exposure to the declines in dmg media. This has led to a slight reduction in the leverage metrics that DMGT needs to maintain a 'BBB-' rating. Despite the reduction, DMGT retains significant leverage headroom within its rating and financial flexibility for operational execution. KEY RATING DRIVERS Continued Decline in Print: Operating profits at DMGT's consumer division, dmg media declined by 23% on an underlying basis in FY16. There has been pressure on operating profits at the division for several years, driven by a combination of structural pressures to sales volumes and advertising revenues at the company's UK newspaper division and costs related to expanding MailOnline, the unit's digital news platform. The declines in print media are unlikely to abate in the short to medium term. While ongoing cost reductions and revenue growth at MailOnline should help margins stabilise over the next two years, visibility on this remains limited for now. B2B Underpins Credit Profile: DMGT's has a strong portfolio of B2B assets that are sectorally and geographically diverse. The division drives about two-thirds of the group's underlying operating profit (excluding Euromoney and corporate costs) and it grew by an underlying 4% in 2016. The assets are by and large, well-positioned with good exposure to growth markets. Of the division's revenue (excluding Euromoney, FY16), 48% come from subscription sources, which supports the visibility and stability of its cash generation. Investments in new platforms, products and start-up ventures could provide a basis for margin expansion over the next two to three years. Deconsolidation Increases Exposure to Print: The deconsolidation of Euromoney has raised the group's exposure to print advertising and circulation to 35% of revenue from 29% while reducing revenue from subscription-based sources to 26% from 33% (based on FY16). The increased exposure of the core business to print and circulation revenues raises the uncertainty of medium-term free cashflow streams, in our opinion. This is reflected in a slight reduction in the FFO-adjusted net leverage that DMGT needs to maintain a 'BBB-' rating from 3.5x to 3.2x. The deconsolidation impact at the cashflow level is less pronounced then at the P&L level due to the retained dividends from DMGT's 49% holding in the business. Further, the retention of sales proceeds from the reduction in stake combined with lower cash taxes and lease capitalisation adjustments to debt, has a beneficial impact on FFO-adjusted net leverage, which in FY17 improved by 0.4x-0.5x as a result. Retained Financial Flexibility: DMGT maintains a measured financial policy targeting net debt/EBITDA up to 2.0x (as defined by company, 1.8x FY16). The company's FFO-adjusted net leverage is expected to decline to 2.3x by FY18 from 3.2x at YE16. The decline is driven primarily by a combination of Euromoney deconsolidation, disposal proceeds, lower cash taxes and reductions in pension contributions. This will provide up to one turn of leverage headroom for the company within its current rating that provides some flexibility to manage operational risks and investment opportunities. The retention of about GBP1 billion of investments in Euromoney and Zoopla add to this. Strategy to Increase Focus and Returns: DMGT's new chief executive has initiated a strategic review of the business with an aim to improve operational execution, increase portfolio focus and enhance the group's financial flexibility. The review aims to create a portfolio of assets that are better aligned to growth markets and those in which DMGT is well-positioned. We believe the focus of the strategy in the short term will be on organic improvement, which will take time to have an effect on the credit profile of the group. Active Portfolio Management: The group's strategy to improve the focus and returns of its asset portfolio implies that acquisitions and divestments will continue to play a central role in the group's strategy. DMGT has effectively used inorganic development to grow its digital business and diversify internationally. Between FY09 and FY16, DMGT made GBP646 million of acquisitions and GBP963 million of disposals, helping it to deleverage. DMGT's approach to M&A has been disciplined and successful, in our opinion, but is not without risk. From a credit perspective the approach makes it harder to envisage the long term nature of DMGT's core business portfolio and risk profile. DERIVATION SUMMARY DMGT's credit profile is anchored around its B2B asset portfolio and a measured financial policy that provides the company flexibility to manage operational risks. Visibility to cash flows in the medium to long term is, however, affected by uncertainties in the evolution of print circulation and advertising, the likely need for continued investments in new products and digital platforms and the active management of its asset portfolio. These are factors that led to a more cautious approach to the rating at 'BBB-'. Peers such as SKY Plc, RELX Plc, WPP Plc and Bertelsmann SE & Co. KGaA have a higher proportion of subscription-based revenues, lower exposure to print and/or bigger discretionary cash flows that support higher leverage or ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Reported revenue decline of 13.5% in FY17 and 4% in FY18 largely driven by the deconsolidation of Euromoney. Growth of 1%-2% thereafter. - Group operating EBIT margins contracting to11.8% in FY17 from 14.4% in FY16 and remaining broadly stable thereafter. - A stable capex to sales ratio of about 5%. - No share buybacks in FY2017. - No significant debt held above the Daily Mail and General Trust Plc level. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - An upgrade would only be possible once greater clarity and success of the digital transition in dmg media has been established and such businesses as RMS in B2B have proven the revenue (and margin) potential of its new platform roll-out. Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO-adjusted net leverage persistently trending above 3.2x, a metric that Fitch expects to correlate to about 2.5x net debt to EBITDA. - A declining print news industry makes the consumer transition to online important. Weakening consumer division operating profit trends could also prompt negative action. Fitch will also monitor the execution risk in major B2B project roll-outs. LIQUIDITY DMGT has no significant short-term maturities, along with undrawn credit facilities of GBP366.5 million, due March 2019. The company is also expected to generate positive FCF across the medium term. Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Fitch Ratings Limited 30 North Colonnade London E14 5GN Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 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 on 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. 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