Data-Driven Strategy And US Growth Will Boost Future Prospects

Key Takeaways

• Reach's transition to a resilient digital business with data-driven revenue will boost growth, as it is significantly more valuable than traditional advertising.
  
• Improved operating efficiency, strategic U.S. expansion, and digital innovation position Reach for enhanced profitability and diversified revenue streams.
  
• Declining print revenue, modest digital growth, economic uncertainties, regulatory risks, and pension obligations could threaten Reach's overall financial stability and growth.

Catalysts

Operates as a national and regional commercial news publisher in the United Kingdom and Ireland.

• Reach PLC's strategy focuses on transitioning to a resilient digital business, emphasizing data-driven revenue which now accounts for 45% of overall digital revenue. This shift is expected to positively impact revenue growth as data-driven revenues are 9x more valuable than mass-scale advertising.
  
• The company's U.S. expansion showed significant progress, with the audience reaching 30 million. This international growth can bolster revenue diversification and build a broader customer base, contributing to future earnings.
  
• Reach has improved its operating efficiency with a 19% operating margin, up from 17%, due to early cost management decisions and a 13% reduction in headcount. Continued efficiency gains are likely to improve net margins and overall profitability.
  
• Digital innovation, including AI-powered tools and the Mantis ad tech platform, enhances Reach's ability to target advertisements effectively, potentially increasing high-value ad revenue, thereby improving net margins.
  
• Reach's investment in video and podcast production and the development of ecommerce and affiliate revenues, with affiliates growing 50% year-on-year, is expected to diversify revenue streams and contribute significantly to future revenue and earnings growth.

Reach Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reach's revenue will decrease by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 15.1% in 3 years time.
• Analysts expect earnings to reach £73.9 million (and earnings per share of £0.23) by about April 2028, up from £53.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 4.3x today. This future PE is lower than the current PE for the GB Media industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Reach Future Earnings Per Share Growth

Risks

• The print segment remains structurally challenged, with a 6% decline in print revenue and a 17% decline in volume, indicating potential future revenue shrinkage as print continues its decline.
  
• Despite current growth, digital revenue only increased by 2.3%, raising concerns about its ability to fully offset print losses, potentially impacting overall revenue growth.
  
• Economic uncertainty and macroeconomic challenges could affect consumer behavior, resulting in volatility in advertising spend and potentially impacting digital and print revenues.
  
• The company's reliance on data-led revenues means any regulatory changes impacting data privacy could affect revenue streams and margins.
  
• High pension funding obligations until 2028, amounting to $60 million annually, could continue to constrain cash flow and limit financial flexibility.

Valuation

• The analysts have a consensus price target of £1.687 for Reach based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.34, and the most bearish reporting a price target of just £0.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £488.1 million, earnings will come to £73.9 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of £0.74, the analyst price target of £1.69 is 56.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.