Nairobi-based Nation Media Group (NMG) is where much of East Africa gets its news.
Its stable of newspapers includes Kenya’s Daily Nation, Uganda’s Daily Monitor, and Tanzania’s The Citizen. The company also owns a growing collection of television, radio, and online assets, including one of my personal faves – Business Daily Africa.
So, is it a worthy investment?
Let’s take a look at how the business performed in 2014 to help us decide.
Here are a few things that jumped out at me as I glanced at the most recent financial statement.
Sales are Treading Water
NMG’s total sales dropped 0.2% in 2014. Why? East Africans, just like people everywhere else in the world, are buying fewer and fewer newspapers and opting for online news, instead.
The problem is that online advertising revenue remains far below the amount needed to pay the salaries of NMG’s news teams and support staff. The group’s newspaper division, which accounts for roughly 85% of group revenue, saw sales drop 5% in 2014. If this trend continues, the scope of its publications will need to be scaled back or else their quality will begin to suffer.
Management’s Trying to Live Within Its Means
CEO Linus Gitahi and his team have done an admirable job of keeping costs in check. They’ve invested in modern, more efficient printing presses and streamlined their distribution systems.
This allowed the company to widen its operating margin to 28.9% from 26.8% a year earlier and to add another year of positive cash flow – a streak that extends beyond 2004, the earliest date for which I have record.
Unfortunately, the costs of writing down an obsolete printing press and other equipment meant that the company reported a 2.2% drop in earnings for the year.
The Balance Sheet Looks Pretty
NMG is unencumbered by debt and sits on a healthy pile of cash.
It also sports a current ratio of 2.4, which gives it some breathing room as management assesses how best to get growth back on track.
Is Nation Media Group a Bargain?
When trying to determine the potential return of an investment, I first construct a plausibly pessimistic scenario for how the company and stock might perform over the next five years.
Our plausibly pessimistic scenario rests on assumptions about three company characteristics:
- book value growth,
- book value multiple, and
Let’s look at each in turn.
1. A Plausibly Pessimistic Growth Estimate
Some investors use earnings as their gauge of a share’s value. Unfortunately, earnings can be a pretty flaky metric. Abnormal events can lead to big spikes or drops in profitability, and the company can massage the numbers to make performance appear better than it actually is.
That’s why I prefer book value. It’s simply a company’s assets minus its liabilities. The better a company performs, the larger it gets, and, unlike earnings, it tends to grow at a relatively stable rate. It’s easy to calculate and is a bit more difficult to manipulate by unscrupulous managers.
Over the past five years, NMG has grown its book value at a rate of 13.4% per year. That’s not bad. But can we count on it to maintain this pace over the next five years?
I don’t think so, and here’s why.
Over the past two years, the company’s sales are treading water, and unfortunately, there’s not a life preserver in sight.
It once appeared that NMG’s broadcast division would be the company’s growth engine, and Television Kenya did post a big increase in operating profit over the past 12 months. But this is coming off of a very low base. In 2013, television and radio contributed less than 6% of the company’s operating profit.
Moreover, with the increasing accessibility of broadband data connections, East Africans’ entertainment options span far beyond the media conglomerate’s lineup of news, talk shows, and soaps. If they’re anything like me, many will soon forgo television altogether in favor of podcasts and binge-watching shows on Netflix and Amazon Prime.
Further lessening the likelihood of a 13% growth rate is management’s decision last year to boost its dividend payout to roughly 75% of earnings. This leaves less cash available to grow the business.
So, I think a more realistic growth rate over the next five years is 9.6% — which is how quickly it’s grown since 2012. If it achieves this, the company’s book value will increase from Kshs46 per share today to Kshs73 per share in 2020.
Kshs46 x 1.096 ^ 5 = Kshs73
2. A Plausibly Pessimistic Book Multiple
NMG’s share price has dropped precipitously over the past six month, but it still trades at Ksh246 per share, a 5.3 price/book ratio. This means the market believes that the company is actually worth more than five times its stated net assets, which suggests at least one of three things:
- The company will grow very quickly.
- The company owns a very large hidden asset.
- The market is irrationally optimistic.
The pessimist in me believes point 3 is the most likely explanation.
So, let’s assume that over the next five years the market begins to see things in a more gloomy light. What kind of price multiple will it award to the shares?
To get an idea, we can look at NMG’s price chart over the past five years.
Could the same thing happen again? You betcha.
Apply this multiple to our anticipated 2020 book value and we arrive at an estimated 2020 share price of Ksh226.00.
Kshs73 x 3.1 = KSh226.00
3. A Plausibly Pessimistic Dividend
The last step of our valuation process is to estimate NMG’s dividend payments over the next five years.
In each of the past two years, the company paid a dividend of Kshs10 per share. Given the company’s stagnant sales growth, the pessimist in me says that we shouldn’t count on much more than Ksh10 per share over the next five years.
So, we’ll multiply Kshs10 by five (for each of the next five years) and add it to our pessimistic 2020 share price.
KSh226 + Ksh50 = Ksh276
A Plausibly Pessimistic Return
Finally, let’s calculate our estimated rate of total return if this all comes to pass.
(Ksh276 / Ksh246) ^ (1/5) -1 = 2.3%
Does a 2.3% annualized return make for a good investment? Not for this plausible pessimist. I’m pretty sure we can find better places to put our money to work.
It’s Your Turn.
Do these assumptions seem reasonable? Which would you change? Let’s hear your thoughts in the comments!