Shares in specialist media company Future (LSE: FUTR) rose by 2.6% today on the news that “record levels of profitability” had been achieved for 2019. Statutory operating profit and earnings grew by 403.8% and 179.3% year on year (YoY) respectively with group revenue growing by 70.3% over the year from £130.1m to £221.5m.
I have kept an eye on Future since it popped up in my search for stocks that could handle Brexit by shrugging off the referendum result with double-digit gains, and it has not disappointed. It has risen from 1,184p then to 1,492p at today’s close, and today’s results do suggest more of the same is to come. But let’s not get to carried away just yet.
Revenues are being bought
Future collects subscription revenues for print publications. Its media division monetises content that appears on websites that it owns through collecting e-commerce commissions and selling advertising space. It also profits from events it arranges around the interests that its websites and magazines cater too.
At its heart, Future is a publisher, but one that caters to lots of specialist and niche interests. Having passionate and loyal customers helps explain the 11% organic revenue growth reported. Yes, you read that right. Growth of existing revenue sources over the year was still decent but acquired revenues really made the difference.
Future’s strategy is one of growing what it has (its existing online audience grew by 31%) but acquiring other brands as well and ramping up revenues from them. Over the last year, three online brands and one print brand have been purchased across the cycling, tech, and targeted business news sphere.
The cost could be as high as £253m, but that depends on the brands hitting certain performance targets once integrated. It’s a smart acquisition strategy. It is also paying, at the most, about 0.82p for every £1 in acquired annual revenue, which isn’t too bad at all.
Future also tries to launch new brands with the acquired editorial and content expertise brought on board – one has been launched this year already with the help of the new recruits – and steadily migrates purchased websites over to its own template platform and applies its own advertising solution.
Low earnings base
The growth in operating profit and earnings was impressive, but they grew from just £5.3m and £2.9m to £26.7m and £8.1 million respectively. Operating margins are now 12.05% up from 4.07% the year before, so overall I’m not blown away by performance in this area, but I was not expecting to be.
Future is a growth company but is already turning a small profit, and generating cash from operating activities (£49.1m last year to put a number on it).
However, Future will have to raise funds for the two planned acquisitions and any future ones because its operating cash flows won’t cover them, which means more borrowings or shares in circulation. Solvency is not an issue at present, but it’s something to keep an eye on going forward.
Am I buying?
Not just yet. There is a deferred consideration charge of £43.9 sitting in with £116.6m of current liabilities, which will have to be paid if certain targets are met, and current assets don’t cover it. Potential liquidity issues make me nervous, and I want them to go away before I can invest in what could be a continuing growth story.
