With the recent default of Greece, all eyes are on the other ‘weak’ European economies. Portugal and Spain have come to the forefront of trades. However, when there is indiscriminate selling, a lot of value can be found. Below is a Spanish stock, which offers a compelling valuation.
This is the first part of a two part series on Promotora De Informaciones (NYSE:PRIS). The two parts are broken down as: 1) Recommendation and Overview, 2) Valuation Analysis, Risks, and Outlook.
We recommend Promotora de Informaciaones S.A. ADS (NYSE:PRIS) as a Buy based on favorable valuation and progression in the turnaround by new management. PRIS is a high risk special situation play with a favorable risk to reward ratio. (PRIS shares on the NYSE is an ADR, which represents 4 PRS:SM shares on the Madrid stock exchange)
We are initiating Promotora de Informaciaones S.A. ADS (NYSE: PRIS) stock with a Buy rating and Fair Value share price of €1.20 ($6.40 ADR), approximately 97% above the current price of €0.61 ($3.25 ADR). We expect the company to continue its turnaround by shoring up its balance sheet as well as reaping the benefits of its expansion to higher growth markets,with a focus on improving operational performance and generating cash flow.
PRISA is a Spanish media conglomerate with diversified revenue streams: 33% from subscriptions, 21% ads, 27% education publishing and 19% press. It is the world’s leading company in the production and distribution of cultural, educational, news and entertainment content in the Spanish and Portuguese language markets. The group is present in 22 countries, and reaches over 50 million users through its global brands EL PAIS, 40 Principales, Santillana and Alfaguara. It is one of the largest media groups in the Spanish speaking market with an extraordinary range of assets.
PRISA collapsed under €5B of debt which caused its financial expense (interest) to consume its operating cash flow. This resulting in PRISA suspending its dividend, reducing its capex (-33% in 2009), and putting in a cost savings plan (-15.3% opex reduction in 2009). A number of asset sales also took place which altered the financial structure of the company. A complete debt restructuring has been done combined with the addition of a financial/ strategic partner (Liberty Acquisition) which resulted in a capital increase. All in, total cash inflow is expected to be €1,142M. PRISA’s recapitalization in 2010 by Liberty Acquisition, a SPAC run by Nicolas Berggruen and Martin Franklin, cut the Polanco’s family control to about 18% (fully diluted) from 71%
Ownership: The largest stockholder is the Polanco family which owns 34% of the stock. The next largest stockholders are Berggruen Holdings Inc which holds 3.7% of the stock and the Slim Helu Family which holds 3.2% of the stock. We like the fact that the main players that orchestrated the turnaround of PRISA still remain the largest stock holders. We also like the fact that Carlos Slim has taken a big interest in PRISA as he himself control quite significant media assets including media conglomerate Grupo Carso as well as 8% of the New York Times. We also like that there are a handful of value shops that hold stakes in PRISA as well including UBS Global Asset Management at 3%, Asset Value Investors at 3%, amongst others.
PRISA’s business activities are organized into the following groupings:
Recent Performance (Year End 2011)
Our overall impressions for PRISA’s 2011 results are neutral. On one hand its restructuring has gone according to plan with limited snags. However, delays in a few deals and negotiations hurt its performance. We like the fact that itwas able to refinance its debt in September (albeit it was delayed) but that gave the firm more room to maneuver.
The restructuring plan that PRISA set forth in 2010 came to an end in 2011 and we are watching closely how it will pay off in the next few quarters. Our biggest concern, after the refinancing, was the declining revenue and EBITDA for the Audio Visual segment. AV makes up over 40% of PRISA’s revenue and nearly 50% of its EBITDA, so close scrutiny over this segment is important to us. We are keeping a close eye to determine when it will stabilize. This however is difficult with the macro-economic headwinds in Spain.
PRISA registered a provision for goodwill impairments of 252.94€ for 2011. It also registered about 250€ in tax provisions, although 38€ is under discussion. The CEO states that there is no cash impact on those provisions and that PRISA met the legal requirements for tax credits. However it is waiting on the tax authorities to make a final decision.
Progressing with the cost reductions efforts, 92% of PRISA´s management voluntarily accepted a 7% reduction in fixed salary. Although we feel the impact will be minimal, it sends a message that management is focused on the long term.
Below are the updates as well as our comments and concerns regarding PRISA’s 2011 performance.
* Total Revenue, adjusted, for 2011 was 2,714€ a 1.3% decline over 2010 and adjusted EBITDA was 493€ in 2011, a 1.7% decline over 2010.
* Advertising still accounts for 23% of total revenues, of which 20% is high growth LatAm. LatAm continues to grow. Revenues up 15.9%, Education up 17.4%, Radio up 4.9%, EBITDA up 11.8%.
* LatAm in 2011 is 24% of total revenue, versus 20% in 2010. However, the good news is that LatAm’s total share of EBITDA grew to 39% in 2011 from 25% in 2010.
* Audio Visual: Revenues down 9.6% to 1,241.10M in 2011 versus 1,372M in 2010. Adjusted EBITDA grew by 16.2% to 224.40M in 2011 versus 193.04M in 2010.This includes a 9.75M in goodwill impairment for Media Capital and redundancies of 18.89M.
* Education: Revenue grew by 12.2% to 720.39€ versus 2010 and EBITDA grew by 4.4% to 173.70€.
* Radio: Revenue 7.1% decline to 277€ versus 406€ in 2010, EBITDA 19.7% decline to 87€ in 2011 from 108€ in 2010.
* Press: Revenues fell by 7.2% in 2011 to 390.01€ versus 420.35 in 2010, and adjusted EBITDA fell by 5.4% to 55€ in 2010 versus 58€ in 2010.This is the hardest hit sector and it’s where PRISA is focusing hardest on cost control. Circulation fell by 6% (El Pais -1.3%, AS -6%, Cinco Dias -0.1%)
*Digital: Revenue grew 6.7% to 55.06€ in 2011 from 2010. Advertising revenue grew 19.1% in 2011 and El Pais is ranked #1 in the Spanish market according to various scoring systems such as ComScore.
* PRISA’s efficiency plan that started in 2010 has been completed in all business areas in 2011. Expenditures reduced by 94.8€ and 1,975 people made redundant or outsourced which is estimated to save PRISA 64.5€ Million annually.
* Cash Flow: In 2011, the CF was -286.42M, including a 95M restructuring cost, 47M in loans of which 38M was to Dedalo which is the printing business. Capex of 218M and 136M of working capital investment. Capex includes extraordinary items such as:
o -51M to ONO losing court battle
o -9M to Espanyol Football Club
o +6M from Barcelona Football Club
o -16M of the TVE canon
o Other delayed payments
o 6M dividend paid to B shares for 2010
o 20M paid preferred Santillana partnership for 25% minority stake
In the next article of our two part series, we will evaluate PRISA’s valuation, the risks involved, and the outlook of the industry.
Disclosure: The author is long both PRIS and PRIS.B (B class) shares.