Daily Mail & General Trust

Daily Mail & General Trust Doubts emerge on RMS(one) H1 trading update Media A delay on the rollout of RMS(one) turns what was a major catalyst for the stock into a two-way risk factor. Slowdowns for newspaper advertising and Evenbase look less concerning in our view. Overall we still believe DMGT can generate a mid-teens EPS growth rate. With valuation attractive relative to this growth, and several potential near term catalysts, we stay positive despite the question mark now hanging over RMS(one). Year end Revenue ( m) Operating profit* ( m) PBT* ( m) EPS* (p) 09/13 1,802 300 282 51.7 16.8 2.2 09/14e 1,881 306 288 53.5 16.2 2.4 09/15e 1,994 334 324 59.4 14.6 2.6 09/16e 2,125 374 371 67.4 12.9 2.9 Note: *Operating profit, PBT and EPS are normalised, excluding intangible amortisation and exceptional items. EPS are fully diluted. No longer firing on all cylinders P/E (x) Yield (%) Following a uniformly positive update in February, DMGT returned to more traditional ways in its update last week with a more mixed trading picture across its diverse portfolio. A further setback on the rollout of RMS(one) takes away a significant positive for the stock: the range of outcomes on RMS(one) now stretches between a 10%-plus boost to group EPS growth and a c 100m write-off, with low visibility for the next six to nine months. Slowdowns for newspaper advertising and digital job ads (Evenbase) and FX pressures from a weakening US dollar are less of a concern in our view. Minor cut to estimates Delay on RMS(one) is more of a blow to sentiment than to forecasts, with slower revenue build-up from the new product offset by lower costs and increased capitalisation of start-up costs. Overall we reduce our EPS estimates by 3% for the current year, 3% for FY15e and 2% for FY16e. Our fair value estimate (SOTPbased) reduces by 4% from 1,120p to 1,070p (23% upside). Valuation attractive, but now a show-me stock The stock had already retraced ahead of this update, and with a 7% fall on the day is now 19% below the high of 1,074p reached on 12 February. With our EPS estimates reducing only 2-3%, the valuation looks more attractive in our view at 15.8x 2014e EPS falling to 14.2x for 2015e (both calendarised). Granted, this is now more of a show me stock regarding the investment in RMS(one). Overall though, we believe the portfolio remains positioned to deliver several years of midteens EPS growth (and close to this even if RMS(one) flops). In the nearer term we see several positive catalysts in the potential IPO of Zoopla, cyclical exposure to the UK economy, increasing likelihood in our view of a cover price rise for DMG Media, and further bolt-on acquisitions similar to the recent purchase of DIIG. Price 2 April 2014 867p Valuation 1,070p Difference 23% Market cap 3,238m Net debt/cash (December 2013) 573m Shares in issue 373.5m Free float 78% Code Primary exchange Secondary exchange Share price performance DMGT LSE N/A % 1m 3m 12m Abs (17.4) (9.5) 22.5 Rel (local) (14.8) (8.2) 16.5 52-week high/low 1,073p 686p Business description Daily Mail & General Trust (DMGT) now derives a majority of profits from business publishing activities, which include RMS, DMG Information, Events and 68% of quoted group Euromoney. Consumer publishing includes Daily Mail, Metro, Evenbase (digital recruitment), Mail Online and Zoopla (53%). Next events Interims 22 May 2014 Analysts Jonathan Helliwell +44 (0)20 3077 5706 Jeremy Silewicz +44 (0)20 3077 5704 institutional@edisongroup.com

Key points from H1 the trading update RMS(one) now more of a risk factor: the catastrophe modelling company generated 17% of group profits in FY13, and the launch of a major new cloud-based platform RMS(one) with near-term margin dilution but longer-term potential to double RMS profits, according to the company was a significant positive catalyst for DMGT shares. The news that the rollout is effectively delayed by six to nine months, to allow customers to appraise the new system and to allow DMGT to build in more functionality, puts a significant question mark over the success of RMS(one), in our view, turning it into more of a two-way risk factor than a positive catalyst. DMGT had already added more overhead cost into the project in 2013, by switching to investing in dedicated data centres. The company argues that this latest change to the rollout is in response to customers requesting time to trial RMS(one) and compare its modelling results to those from their existing systems, as well as allowing DMGT to add extra functionality, which has proved popular during the extensive beta phase of the rollout. It nevertheless suggests some degree of customer resistance, implementation challenges or software delays from DMGT, the extent of which is very hard for investors to gauge from the outside. Near-term profit numbers are not affected, as slower revenues are offset by increased capitalisation of prelaunch costs. In the long term the company still sticks by its guidance that RMS profits could double on the back of RMS(one) (although there was never a timescale for this target). However, near-term revenues are lower and the financial risk of the whole project is increased, with total capitalised costs now moving up to around 83m and implementation hurdles still clearly yet to be jumped. Advertising slowdown: a sharp turnaround in advertising for DMG Media was a second unpleasant surprise in this update. Total underlying ad revenues for the division swung from +5% in Q1 and +6% in the first five weeks of Q2 (ie January and early February) back to +5% for the five months to February, including a swing to -7% year-on-year for the four weeks since 23 February. This negative figure would have been -4% even adjusting for the later timing of Easter this year, and reflected a dip in spending from six large advertising accounts of DMGT: three supermarkets, one retailer, one finance company and one auto manufacturer. We see no reason to get too concerned at the present: (1) advertising numbers can be very volatile, particularly when looking at such short periods; (2) a short-term hiatus in supermarket spending is perhaps understandable, given the profit warnings and strategic changes emanating out of that sector recently; but the very same factors suggest that the sector will remain ultracompetitive and that supermarkets will need to stay noisy in advertising terms; and (3) the broader macro-backdrop to the UK economy suggests a positive environment for advertising over the medium term. DMGT maintained its own guidance for total DMG Media adspend to range from -2% to +2%, as before, nor have we have changed our own full year estimate of +1%. FX weakness: DMGT added a paragraph in this update to highlight the fact that all its guidance is given at constant FX, and also that recent US dollar weakness relative to sterling will affect full year numbers (DMGT earns 40% of revenues and around 55% of profits in US dollars). This is not a surprise, although marking to market for FX (forward rate of $1.66 now assumed) accounts for around -1% within our earnings estimate changes in Exhibit 1 below. Some positive trading news also: more positively within this update, the Events and Information divisions continue to trade extremely strongly, core RMS is continuing to grow rather better than we had allowed for, and Euromoney has picked up slightly from a flat start to the year. Events continues to benefit from reformatting of its major shows to more frequent timings. Following a successful move of ADIPEC in November from biennial to annual, DMGT s Gastech show, which is currently taking place in South Korea, as an 18-monthly show for the first time rather than a biennial one, is showing revenue growth of 40% versus the previous Daily Mail & General Trust 2 April 2014 2

event in October 2012. Information continues to sustain a 14% underlying revenue growth rate, with Hobsons (education), Genscape (energy) and property information all growing at double-digit rates. Digital classifieds and Zoopla: DMGT did acknowledge some slowdown in its digital jobs classified business, Evenbase, with other digital advertising (Evenbase and Wowcher) slowing from +13% in Q1 to +7% after five months, implying a broadly flat January-February. DMGT acknowledged some contraction at jobrapido (a jobs aggregator website), which it attributed to its own decision to prune unprofitable revenues following a review of job acquisition costs. More broadly, DMGT was agnostic in its response to a question as to whether its recent disposal of OilCareers was an indicator of reducing strategic interest in the digital classified sector. No update on Zoopla was provided, other than that the business continues to trade well and continues to explore various strategic options. We continue to see an IPO of Zoopla as a potential near-term catalyst for DMGT shares, with DMGT a potential seller of some of its current 52.6% stake in our view. Growing likelihood of cover price rises: circulation revenue trends at DMG Media for the five months to February held at -2%, but may worsen a bit in the near term as the company has now cycled past the anniversary of its last cover price rise (+5p to 60p for the Daily Mail Monday to Friday implemented on 4 February 2013). However, while DMGT would never comment on it for competitive reasons, we believe the stars are aligning well for a further cover price rise in the medium term: (1) newsprint prices are rising; (2) advertising revenues (at least recently) are faltering; (3) the newspapers are performing resiliently in circulation terms, with record market shares in a declining market; and (4) the background UK economy is increasingly solid. Changes to estimates Our divisional profit estimate for RMS reduces by 12m to 43m for the current year (in line with the low end of management s guidance, which was maintained at 45-50m on a constant currency basis). For FY15e and FY16e, our RMS estimates reduce by only c 5m pa, as we essentially give management the benefit of the doubt that RMS(one) does roll out successfully, albeit six months later than planned. We have left our top-line growth assumption for DMG Media unchanged at +1% for the current year (after +2% reported for October-December and around -3% implied for January-March). As discussed we do not expect the recent lull in supermarket advertising to be sustained, while we see increasing chances of a cover price rise before the end of the fiscal year. Factoring in also strong trading for Events and Information, plus a further 1% trim due to FX (US$1.66/ forward rate now assumed), overall we reduce our EPS estimates by 2-3% as highlighted in the table. Exhibit 1: Changes to EPS estimates Y/E Sep 2014e 2015e 2016e New EPS p (adjusted, diluted) 53.5 59.4 67.4 Previous 55.2 61.4 68.7 % change -3.1% -3.2% -1.9% Consensus EPS (Bloomberg) 53.2 58.8 65.8 Edison variance % 0.5% 1.1% 2.4% Source: Edison Investment Research estimates, Bloomberg Fair value estimate -4% to 1,070p (23% upside) Our fair value estimate (SOTP-derived, as before) reduces by 4% from 1,120p to 1,070p. This is driven by our lower estimates plus a slightly lower market price for Euromoney, with no change to the valuation multiples we ascribe to each key business unit. Daily Mail & General Trust 2 April 2014 3

Exhibit 2: DMGT sum of the parts valuation 1,070p Year end September 2014e ( m) Revenue Op profit Rev valn x Op pft x Net pft x % owned Valuation Per share p RMS 178 43 4.7 19.5 25.0 100% 844 218 DMG Information 396 75 2.9 15.6 20.0 100% 1,162 301 DMG Events 101 26 3.4 13.3 17.0 100% 341 88 Euromoney (@ 1,223p) 417 125 3.7 12.5 16.0 68.1% 1,054 272 Total B2B 1,092 269 3.6 14.5 18.6 3,401 879 Daily Mail/Mail on Sunday 531 60 0.9 7.8 10.0 100% 470 122 Mail Online 57 (10) 14.0 N/A N/A 100% 804 208 Metro, 7 Days 80 15 1.1 5.9 7.5 100% 88 23 Evenbase 90 21 3.5 14.8 19.0 100% 311 80 Other 31 (5) 0.5 n/a n/a 100% 16 4 Total DMG Media 789 81 2.1 20.8 26.6 1,688 436 Sub-total 1,881 350 3.0 16.0 20.5 5,089 1,316 Zoopla 17 12.4 29.4 37.7 50.8% 500 129 Local World 14 4.7 6.0 37.8% 66 17 Other 1 4.7 6.0 5 1 Total associates 32 570 147 Group total (cont ops) 382 5,659 1,463 Central costs (B2B) (26) 14.5 100% (371) (96) Central costs (DMG Media) (18) 20.8 100% (383) (99) Gross SOTP (44) 4,904 1,268 Net debt (ERM-adjusted) (563) (146) Pension liability (208) (54) Minority liabilities, tax assets 0 0 Net SOTP 338 4,133 1,070 Source: Edison Investment Research. Note: Multiples used to drive valuation are highlighted in bold. Net debt is adjusted for debt within Euromoney Exhibit 3: DMGT divisional estimates Year end September ( m) 2010 2011 2012 2013 2014e 2015e 2016e FX /US$ average rate 1.56 1.61 1.58 1.56 1.65 1.66 1.66 % change y-o-y -1% -3% 2% 1% -5% -1% 0% /US$ period end rate 1.63 1.56 1.62 1.62 1.66 1.66 1.66 % change y-o-y -2% 4% -4% 0% -2% 0% 0% Revenues RMS 153 159 163 175 178 219 258 DMG Information 231 232 253 293 396 436 480 DMG Events 111 132 89 87 101 104 119 Euromoney 330 363 394 405 417 438 464 Total B2B revenues 824 886 899 960 1,092 1,197 1,320 DMG Media 883 862 848 793 789 797 805 Other/discontinued 261 236 213 49 0 0 0 Total DMG Media revenues 1,144 1,098 1,060 842 789 797 805 Group revenues 1,968 1,985 1,960 1,802 1,881 1,994 2,125 Operating profit RMS 45 48 56 57 43 48 64 DMG Information 47 42 48 58 75 85 97 DMG Events 30 39 21 21 26 27 32 Euromoney 96 93 112 119 125 132 140 Total B2B op profit 218 221 237 255 269 293 333 DMG Media 89 76 78 80 81 88 89 Other/discontinued 27 17 26 7 0 0 0 Total DMG Media op profit 116 93 104 88 81 88 89 Head office costs (34) (33) (41) (43) (44) (46) (48) Group operating profit 301 281 300 300 306 334 374 Source: Edison Investment Research, DMGT accounts Daily Mail & General Trust 2 April 2014 4

Exhibit 4: Financial summary m 2010 2011 2012 2013 2014e 2015e 2016e September IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 1,968 1,985 1,960 1,802 1,881 1,994 2,125 Cost of Sales (287) (240) (214) (196) (205) (217) (232) Gross Profit 1,681 1,745 1,746 1,605 1,676 1,776 1,894 EBITDA 368 362 404 366 381 412 454 Operating Profit (before amort. and except.) 301 281 300 300 306 334 374 Intangible Amortisation 0 (52) (54) (43) (43) (43) (43) Exceptionals 0 (42) 31 (29) (44) (18) (17) Other 2 5 13 22 32 36 40 Operating Profit 303 192 290 250 251 310 354 Net Interest (73) (54) (57) (40) (50) (46) (43) Profit Before Tax (norm) 230 233 255 282 288 324 371 Profit Before Tax (FRS 3) 230 138 232 210 202 263 311 Tax (31) (34) (39) (52) (56) (66) (80) Profit After Tax (norm) 199 198 216 230 232 258 291 Profit After Tax (FRS 3) 199 104 306 220 145 197 232 Average Number of Shares Outstanding (m) 383.0 382.8 382.8 377.5 369.2 370.1 371.0 EPS - normalised (p) 46.4 46.1 49.4 53.0 54.9 61.0 69.1 EPS - normalised and fully diluted (p) 46.3 45.3 47.9 51.7 53.5 59.4 67.4 EPS - (IFRS) (p) 46.4 21.5 74.0 52.3 31.5 44.7 53.1 Dividend per share (p) 16.0 17.0 18.0 19.2 20.7 22.7 25.0 Gross Margin (%) 85.4 87.9 89.1 89.1 89.1 89.1 89.1 EBITDA Margin (%) 18.7 18.3 20.6 20.3 20.3 20.7 21.4 Operating Margin (before GW and except.) (%) 15.3 14.2 15.3 16.6 16.3 16.8 17.6 BALANCE SHEET Fixed Assets 1,733 1,636 1,625 1,662 1,723 1,754 1,765 Intangible Assets 1,114 1,035 986 1,057 1,117 1,151 1,166 Tangible Assets 378 327 245 214 189 157 121 Investments 241 273 394 392 417 446 478 Current Assets 455 555 546 453 412 545 733 Stocks 28 23 28 25 26 28 30 Debtors 362 358 410 340 355 376 401 Cash 66 174 107 89 31 141 303 Other 0 0 0 0 0 0 0 Current Liabilities (761) (793) (812) (792) (825) (871) (924) Creditors (747) (764) (762) (790) (823) (869) (922) Short term borrowings (14) (29) (50) (2) (2) (2) (2) Long Term Liabilities (1,277) (1,289) (1,103) (987) (987) (987) (987) Long term borrowings (913) (865) (670) (660) (660) (660) (660) Other long term liabilities (363) (424) (432) (327) (327) (327) (327) Net Assets 150 108 256 337 323 441 587 CASH FLOW Operating Cash Flow 370 421 428 458 388 421 466 Net Interest (66) (64) (68) (54) (50) (46) (43) Tax (9) (47) (34) (37) (51) (60) (72) Capex (52) (56) (98) (94) (110) (80) (60) Acquisitions/disposals 41 0 42 (25) (90) (10) (10) Financing (7) (37) (55) (139) (72) (36) (33) Dividends (57) (62) (66) (70) (74) (79) (87) Net Cash Flow 221 155 149 39 (58) 110 162 Opening net debt/(cash) 1,049 862 720 613 573 631 521 HP finance leases initiated 0 0 0 0 0 0 0 Other (34) (13) (43) 1 0 0 (0) Closing net debt/(cash) 862 720 613 573 631 521 359 Source: Edison Investment Research, DMGT accounts Daily Mail & General Trust 2 April 2014 5

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