Shares in newspaper publisher Reach (LSE: RCH) rose by 25% in early trading on Friday after the company said 2020 profits would be higher than expected. The Reach share price has now risen by an impressive 340% since last August.
Today’s news is particularly good because the firm’s digital division generated the extra profit. Reach’s print newspaper business — which includes titles like the Daily Mirror, Express and many local newspapers — is in decline. The company hopes to replace lost income from print sales with growing advertising sales from its network of news websites.
In December, the company said that five million customers had signed up to its new Reach ID system. This will be used to provide “data and customer insights across a user’s activity” to boost advertising sales.
2020: better than expected
Reach says that its underlying operating profit for 2020 is now expected to be between £130m and £135m. From what I can tell, previous expectations were for a figure of about £125m.
That’s a useful increase, but where has it come from? According to the company, digital revenue rose by 25% during the final quarter of 2020. That’s an increase from the growth rate of 13% reported for the third quarter.
However, this digital growth wasn’t enough to offset a continued decline in print sales, which fell by 12% during the quarter.
Its total revenue for the fourth quarter fell by 10%. Although this may not sound great, it’s an improvement on the 15% decline reported for the third quarter of 2020.
Reach’s share price seems to be rising today due to renewed optimism about the prospects of its digital business. This is key to its future survival.
Reach share price up, profits down
I mentioned above that total sales are still falling. So are profits. Even after today’s upgraded guidance, my sums still suggest that operating profit may have fallen by around 15% last year.
However, broker forecasts suggest that 2021 could see the group’s profits return to modest growth. But the company still needs to prove that it can generate enough profit from online publishing to replace what’s been lost from print newspapers. After all, sales of newspapers seem unlikely ever to return to growth.
There’s also a second risk that investors might want to investigate. Reach has a huge pension scheme with a deficit of more than £200m. The company is currently committed to making contributions of around £50m a year to this scheme — more than one-third of its operating profits.
According to the company, the latest three-yearly review of the pension scheme is due to complete shortly. Any significant changes to the deficit or to the payments required could affect Reach’s share price.
Investors considering Reach may be attracted by the stock’s low price/earnings ratio. But the uncertain outlook for growth and pension deficit are also factors that could affect the value of this business.