Author Topic: NORTHM - Northmedia  (Read 5130 times)

yadayada

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NORTHM - Northmedia
« on: May 23, 2014, 05:47:22 AM »
This company is the biggest distributor of print folders for supermarkets and other retail in Denmark. They als own the largest newspaper in Denmark. They also own several online businesses. THey own the 2 largest websites where building contractors offer their services. And they own the third largest job portal website. Im not happy about this one because apparantly they are competing against the largest government owned website here, and they have some unfair advantages. Neither of those online businesses look that valuable compared to the market cap.

What they do have is the largest portal for matching real estate agents with people looking to rent or buy a house. Sort of the Danish Rightmove.co.uk (is publicly traded). This business seems to benefit from the network effect.

They also own some small start up ventures like a electronic doorlock that is opened by smartphone.

What is interesting is that their market cap now is about 400 million DKK (about 40 million euros I think).

But if you look at their free cash flow since 2005 (their print business peaked several years ago) they generated about 800 million since 2005. Equity after intangibles is less then 400 million, but they divested some of their land buildings and machinery for a nice profit in 2008. So equity might be worth more here. And they are still generating nice cashflows here!

Another thing is that they are basicly in slow liquidaton. They are slowly downsizing their business each year, and if margins contract they simply fire a lot of their part time employees to get profit up again. This also means that actual capex is lower then Depreciation&amortization.

And reading their AR's I get the impression this company si well run. The 70+ year old Founder still owns more then half the shares. This ensures that capital is returned to shareholders. Company also seems to have a entrepreneurial spirit. Their Noadd+ program is a good example here. Their Bekey (the smartphone lock) as well.

They expect 50-75 million of ebit this year, which probably means more FCF, on a 400 milllion market cap. So far these estimates have always been on the conservative side.

They also seem to benefit from newspapers shrinking beccause they own the largest one. They basicly get some of the readers when those small newspapers go down. So they have the slowest decline in newspaper readership in Denmark.

Only downside is that I havent figured out where to buy this yet :) .

Also their online segment is growing, but is still losing money. This is mostly because of advertising. I think their housing platform can probably make a nice profit, and deserves a pretty high multiple. Their jobs and building contractor websites still need more momentum tho. But I dont think the founder will allow management to throw a lot of good money after bad here.

Thoughts?

Added figures in attachment
« Last Edit: May 23, 2014, 05:49:58 AM by yadayada »


alwaysinvert

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Re: NORTHM - Northmedia
« Reply #1 on: May 24, 2014, 10:07:39 AM »
There is the issue of an added tax on print media, which has been looming for a while now. I don't know the current status of it. Also, FK is fighting some pretty hard secular trends. Ad revenue, mail distribution etc. I mean, it's not actually a badge of honour being the "largest newspaper in Denmark" when you give away the paper for free and with an opt-out model, rather than an opt-in one. It could obviously still be a good business, but it's not comparable to the other newspapers.

I haven't really revisited the idea since last summer (can't find my notes), because the share price has almost doubled since then. But this is essentially a bet on contracting businesses (no great ad revenue drops) + online business ventures at this point. I liked it when half the market cap was in real estate available for sale, the stock portfolio and cash.

The FCF generation since 2005 is mostly irrelevant - the structure of the company was way different a few years back. They sold some Swedish assets for a pretty hefty price compared to current market price (have you subtracted that from your FCF figures?)

edit: I realized that I confused their acquisition in the fall with another acquistion by another Danish print media company...
« Last Edit: May 24, 2014, 10:11:00 AM by alwaysinvert »

yadayada

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Re: NORTHM - Northmedia
« Reply #2 on: May 24, 2014, 12:20:20 PM »
yeah they did sell a minority stake for like 400 million or so? That was on the books for next to nothing. probably want to discount that, allthough they still have some other minority stakes on the balance sheet. The chairman seems to be an investor/entrepreneur type person.

I do think that the real estate platform could be worth their current market cap in a year or 2. It is already the largest, and it seems in the end, there will probably be one dominant player. My guess is that currently they are probably worth between 100-200 million DKK. Large moat, large return on capital and a v steady business. My guess is , this is probably half their online revenue? Rightmove.uk has 50% net profit margins. If they could do only 20% with 70 million DKK , that is like 200-250 million DKK.

The builder and job site? I have no idea. They do seem to have some sort of platform for the job site, and that business is cyclical and in a through. They also seem to be selling some kind of software platform here, and they ahve synergy with their newspapers.

Also dont underestimate their folder business. 75% of marketing by supermarkets is done through these folders, and it is only slightly declining. Apparantly their largest competitor is trying to lure customers away with lower prices then they offer their own, and this is suposed to be illegal (they are suing and won in the past). They are also setting themselves up online in this area. It seems a value adding service and not just spam (at least my mom always checks these things for sales).

ANd then there is their no add+ program, post denmark actually sued them to get acces to this and lost. They could leverage this to distribute trade mags etc.

Their bekey (not high hopes tho)

I left it alone after it went over 300m DKK , but I think all together this could still be a bargain. When their online business starts making money, they could yield high multiples, and then their print business could still generate several 100 million in value. And then there are their assets on the balance sheet... I have no idea if it's worth 600 or potentially much more then that?

And are all their newspapers free? I think they bought up some smaller papers that are subscription? Synergy's have yet to kick in here.


The way I see it, you get a lot of optionality, pretty good management and protection on downside by assets. I find it hard to gauge what potential could be here tho
« Last Edit: May 24, 2014, 12:25:10 PM by yadayada »

writser

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Re: NORTHM - Northmedia
« Reply #3 on: June 23, 2020, 05:31:13 AM »
I was about to open a topic about this name but I was pleasantly surprised to see that my friend yadayada already did so a few years ago. I hope he pulled the trigger on this name because it is up ~170% since and paid some dividends along the way. Anyway, I'll try to share some thoughts here in the near future.
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writser

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Re: NORTHM - Northmedia
« Reply #4 on: June 26, 2020, 03:47:30 AM »
So, I'll share some of my thoughts. North Media is a Danish small-cap, founded in 1978 by Richard Bunck (born in 1940) who owns ~55% and is still on the board (though not as chairman). By far the largest business segment of North Media is retail leaflet distribution - let's just call it what it is: physical spam-mail. The major thing that happened since somebody posted in this thread is that in 2017, PostNord Denmark (basically the Danish national postal service) stopped with the delivery of retail leaflets. The chairman had this to say in the 2017 annual report (some snippets):

Quote
”The postman is delivering anyway”. With these words, a Minister of Transport motivated and dismissed FK Distribution’s complaint about PostNord’s very low prices for distributing retail leaflets. For more than 50 years, FK Distribution has distributed unaddressed retail leaflets to Danish households in competition with “the Mail” as the state-owned PostNord is called colloquially. For many years, it has been FK's clear conviction that the Mail was subsidizing the distribution of retail leaflets with resources from the distribution of letters subject to universal postal service.
[..]
”The postman is delivering anyway” – and so he might just as well carry retail leaflets – implicitly at marginal costs. This was the ruling understanding between the Mail and the politicians, regardless of party. But lo and behold! The volume of letters dropped, and the Mail had a new head appointed who was good at his arithmetic. He could see that the postmen were delivering anyway all right, but they no longer carried letters, together with mainly retail leaflets and weekly newspapers and mostly the latter! And oops! What was previously considered marginal costs had in reality been transformed into ordinary costs. The Mail’s quite considerable distribution capacity could no longer be funded by high letter postage prices, because the letters no longer existed, but instead they were now to be funded by the retail leaflet and newspaper distribution prices that Mail itself had competed down.
[..]
The moral is that it should be clear to politicians that you should not let a government-owned player with a monopoly carry out tasks subject to competition at marginal costs, but this is what they let the Mail do.

So, for decades this company operated an extremely marginal business. But suddenly, in 2017, when the national postal service stopped delivering retail leaflets in Denmark, their fortune turned around. There was no competition anymore, they could jack up prices and basically overnight this segment turned into an very profitable cash generating machine. Mostly, the cash that has been generated has been invested in a securities portfolio and returned to shareholders through both dividends and share buybacks. In Q1 2020 they bought back 500k shares or ~2.5% of shares outstanding. Not too shabby. The company states that they want to "maintain capital resources in the region of DKK 550 million (cash and securities)". As they currently are around that level that implies that they will continue to distribute earnings to shareholders.

North Media was also active in the regional newspapers but they exited that business in 2020. There are two other business segments left: an online segment that looks like it is starting to become profitable and 'Bekey' - a digital doorlock. Not profitable but also showing an encouraging trend over the past few years. So, all in all this is a bit of a grab bag of assets (sorted by size):

- Leaflet distribution business
- A concentrated securities portfolio with Amazon, Mastercard, Visa, Facebook and a bunch of companies I don't really know. Securities portfolio was worth ~350m as per the latest quarterly but it's reasonably easy to estimate its live value, should be around ~480m now.
- Online business
- Bekey 'digital doorlock' business.

Online generated ~11m in EBIT last year.  Q1 2020 implied some growth. I think we can value this at around 100m DKK conservatively. Bekey: I don't know. l personally think that it has some potential and value it at 50m DKK, but DYODD. There's also some 118m DKK cash on the balance sheet. I'll be conservative and require that they can't operate with negative working capital. That still means there is ~50m in excess cash. From what I can see the real estate on the balance sheet is also conservatively financed and valued, but I'll assign no value to that. That gets me to ~685m in 'other assets'. I think the company should, and will, trade at a holding discount. As I said it's a grab bag of assets - I don't see why a leaflet distributor should own shares of Amazon .. Also, the securities portfolio is very tax inefficient as the holding has to pay taxes over any gains - if I hold shares of Amazon directly I don't have to do that. The tax rate in Denmark is 22%: that seems like a ballpark sensible number to use as a holding discount.

The most difficult part of valuing this company is, imho, slapping a number onto the distribution segment. Right now it is insanely profitable but it has been a bad business for decades. Do we expect the current situation to persist? Will a competitor (re-)enter the market? What is the future of leaflet distribution? I think it would be dangerous to extrapolate the current results too long into the future.

However, given all my assumptions we can infer how the market is valuing the distribution segment with the share price being ~54 DKK. Using a 23% holding discount and all the numbers given above, I arrive at ~620m DKK. No matter how you slice or dice it, that seems very cheap for a segment that generated 172m EBIT in 2019. Even better, as of June 2020 the company is still giving guidance for 2020 "in line with 2019". That would mean another ~100m+ DKK in EBIT for the distribution segment in the remaining three quarters of 2020, implying you are paying even less for the future earnings of the distribution segment. On top of that, the company is testing the distribution of leaflets for Deutsche Post in Germany. I'm assigning no value to that but it is potentially an exciting expansion of business.

What is the fair value of this segment? I don't know, but ~620m DKK seems too cheap for a business that is generating ~150m DKK in EBIT (and generates a lot of cash too) from 2018 - 2020. If I slap a conservative 6x multiple on that I arrive at a share price of 65 DKK. All in all I find it hard to make a set of assumptions that leads to a valuation that is lower than the current stock price. Obviously there's the risk that the securities portfolio implodes but that's a known risk that I'm willing to accept.

With some (I think overly) conservative assumptions I arrive at 65 DKK or 20% upside. From what I see capital allocation has been somewhat decent the past few years: they have gotten rid of several problematic assets, have not pumped too much cash into ridiculous ventures and now have three 'core' business segments. From what I can see I'm not too unhappy with any of them. I don't really like the tax overhead of the securities portfolio in the holding but it's probably tax-efficient for the founder of the company. Speaking about that, Bunck is now about 80 years old and the company has really been ramping up its investors presence over the past few years. Who knows what's on the horizon ..

Some open questions:
- What is the end-game of Bunck? His strategy looks a bit inconsistent: at the one end the company is marketing itself to investors, suggesting he wants to sell. On the other hand the large securities portfolio suggests he wants to use the company as his personal pension fund. Does he have a family? Is there a succession plan?
- What is the future of retail leaflets in Denmark? As far as I understand there is currently an opt-out system in place in Denmark and also a 'smart' opt-out system where customers can choose what leaflets to accept. Currently ~50% of households have opted out and that number seems to have stabilized. There are some rumors about Denmark switching to an opt-in system. Obviously that would be bad for business.
- Is there any chance that a competitor could enter the market? Or that PostNord re-enters the market? The current state of affairs seems to good to last but on the other hand leaflet distribution is probably not a too exciting business to enter.
- Bekey: does it have any growth prospects? Or is it destined to fail or be a marginal business?
- Is there much value in the potential expansion in Germany?

I have a small position. A declining business that you can buy at a very low EV/EBIT multiple. Very conservative balance sheet, founder with 55% stake is 80 years old and the company is ramping up IR presence. Distributing cash to shareholders and not plowing too much cash back into the business. Some optionality in Bekey, real estate and expansion in Germany. Hard to pinpoint upside exactly, probably not the most exciting (nor the best) idea ever but good enough for me and it fits my style. The whole situation reminds me a bit of Rella, a similar company in Denmark that was taken private a few years ago. That turned out nicely.

I'm hoping that some fellow Scandi board members can tell me why this is a terrible idea.
« Last Edit: June 26, 2020, 03:50:50 AM by writser »
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Jurgis

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Re: NORTHM - Northmedia
« Reply #5 on: June 26, 2020, 08:00:15 AM »
Not a company I'm interested in, but very nice writeup writser.  8)
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John Hjorth

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Re: NORTHM.CPH - North Media A/S
« Reply #6 on: June 26, 2020, 08:04:25 AM »
Yes, let's talk about stocks, writser!

Attatched is the Annual Report for Mr. Bunck's private holding company, called Baunegaard ApS
« Last Edit: June 26, 2020, 08:20:45 AM by John Hjorth »
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writser

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Re: NORTHM - Northmedia
« Reply #7 on: June 26, 2020, 08:38:33 AM »
John, thanks for sharing that.  Maybe this is something you can help me with: are there any tax advantages for Bunck with regard to holding a stock portfolio in his operating company? I.e., suppose North Media liquidates their stock portfolio, pays out a massive dividend / buyback. That would allow Bunck to replicate his stake of the portfolio in his personal holding, while giving other shareholders the choice what to do with their money. Seems like an easy win, so why doesn't he do that?

I guess a distribution from North Media would be taxed? As a majority owner, what taxes would Baunegaard be required to pay over such a massive dividend?

Also, why is he not paying any taxes in his personal vehicle? There should be huge capital gains in 2019. Does he have offsetting losses? Doesn't he have to pay them because he is a controlling shareholder of North Media? Or is Baunegaard some sort of transparent entity and is he taxed on a personal level? I don't quite understand the details.
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Cigarbutt

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Re: NORTHM - Northmedia
« Reply #8 on: June 27, 2020, 08:45:41 AM »
This is a stock i can relate to and will provide some perspective.

Note: A while back, I formulated an opinion about a different kind of distributor (home respirators) and my intrinsic value of the stock has not changed but the stock price has been multiplied by 3 to 4. So, if pressed for time, just skip.

The theme is investing in a declining business, trying to estimate the decline and to evaluate the risks of transforming a model.

About 11 years ago, i invested (I rarely trade) in a CDN envelope manufacturer. It was a similar story. Using free cash flows and without using high leverage, the company (Supremex, SXP.TO) had been able to form some kind of natural monopoly and was planning to slowly evolve into more modern and customized products. The idea was that decline in traditional mail would be mitigated by the still growing direct-advertising mail. i bought the stock after it declined more than 60% after IPO price (looked good using classic value parameters, similar to the North Media example). Clarke (CKI.TO) was also involved during that time and they even tried to buy the company (up to about 45% ownership around 2013) when the share price kept falling, before selling their entire stake (2014). I ended up about breakeven (including dividends) but the opportunity cost was huge. It would have been possible to make money using certain time intervals, but the odds were low. The conclusion: the process and outcome were considered poor, in retrospect. The key aspects were that 1-it is hard to predict the course of a declining business as the decline can accelerate or change trajectory, especially during recessions etc and 2-transforming business models rarely succeed. BTW, the direct advertising mail did hold up fairly well over the years but Canada Post just reported recently very unusual declines that seem to correspond now to a true shift. Supremex is trading pretty much at the same level as when Clarke sold in 2014.

I’ve followed somewhat closely over the years the Yellow Pages phenomenon. It’s basically a book that used to be widely distributed to households and contained residential phone numbers as well as a voluminous list of small and medium business advertising. It used to (before 2003) be held by BCE (BCE.TO, a large communication and media company). Similar to North Media, it produced a very high level of free cash flows based on an asset-lite model. BCE was criticized when they sold the cash cow but the move was relatively prescient. Over the years, the idea (again) was to continue to enjoy high and slowly diminishing free cash flows and to reinvest into more promising area which, for Yellow Media (no longer trades under that name) meant to switch to an equivalent online channel. They made some financial allocation mistakes (used too much debt, kept a high dividend too long etc) but, again, the major issues were sticking to an older model too long, underestimating the decline of the old model, especially during tougher economic environments which tend to accelerate trends and difficulty in redeploying cash in other profitable opportunities (even in related and relevant sectors). At many points along the way, there were “value” opportunities (equity, bond) but, even with retrospective hindsight, it would have been very hard to make money.

Another aspect is the environmental concern. Recently (2019), Transcontinental (a printing, regional newspaper business who also holds a relative monopoly on print commercial leaflet distribution in my province, TCI.TO, a or b categories) had to appear in largely publicized hearings (with the opt-in vs opt-out question) and, in their defense, suggested that 1-printed retail flyers are essential for a segment of the population, 2-their distribution business produced general economic benefits and 3-more than 90% of their distributed products were “handled” by the end consumer. I thought their arguments were weak and getting weaker and they did not mention that a significant % of people “handling” of the product is to pick it up and throw it in the garbage.

In my area, I hear that Loblaw (a national grocery chain, L.TO) is moving away from print commercial leaflets and maybe something similar is going on in Denmark.
https://www.thedrum.com/news/2019/12/17/how-aldi-boosted-retail-traffic-while-reducing-its-flyer-drops

I’ve looked at North Media to a limited degree and used also the following for some data:
https://www.introduce.se/contentassets/66b8d1a85d7f4a23a9bc2eb93a2b93a7/pdf/leading-print-ad-distributor-plans-to-digitalise.pdf
Of course, from a « value » standpoint, there is a lot to like. The typical PE, cashflow or EV to EBITDA measures all look good, the company has a relatively low debt level and they have built an interesting portfolio of securities. Without the previously described notions, it’s something to consider and maybe there is something about North Media or the Denmark market that is different. The Bekey sub has an interesting product but the potential for a material contribution to the bottom line is hard to assess.

Personal anecdote: Last week, my household went to a restaurant (opening up phase). The environment is different because of the social distancing rules. When we sat down, household members naturally used the embedded QR codes on the table to access the menu and I think I was the only one who reflected that this would be another item (printed menus) that would go down the dustbin of history.

Sorry long (and somewhat irrelevant) post but somehow I wish I had had this kind of feedback some years ago as it may have helped me to buy the alternative opportunity which, since that time, has been multiplied by about 12. It wouldn’t have changed my life but I would be richer today.

John Hjorth

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Re: NORTHM.CPH - North Media A/S
« Reply #9 on: June 27, 2020, 12:05:16 PM »
writser,

I'm sorry for a late reply here about the taxation. [We have had a heat wave here the last couple of days - it has been so unbelievable hot that I couldn't think!]

Joint taxation :

Baunegaard ApS and North Media A/S are in a joint taxation with Baunegaard ApS as "administration company", which means that Baunegaard ApS is filing all the tax returns for all companies within the whole group [Baunegaard ApS, North Media A/S and subs]. Taxes payable [paid by Baunegaard ApS] are then allocated among all companies based on their individual taxable incomes. [Allocation method called "Full allocation".] This setup for taxation is here in Denmark an option, it's not statutory.

The advantage for the group here is that it utilize tax losses in subs running at losses, while without joint taxation this would imply tax loss carry forwards at the subs running at a losses.

Taxation at Baunegaard ApS :

Dividends among group companies where all the legal entities are Danish companies are free of dividend withholding tax, subject to the distributing company files a so called "Dividend form" with the Danish IRS. This applies independent of joint taxation or not. It's actually not a perfect mirror of the accounting criteria for consolidation, but has to do with an ownership threshold above 20 percent.

Please note that there are no deferred taxes in the Baunegaard balance sheet [, which is correct]. Mr. Bunck can sell the controlling share holding in North Media A/S without incurring taxes on the gain at all in Baunegaard ApS. [This is because Baunegaaard ApS is [mostly] a pure play investment holding company.]

Taxation at North Media A/S :

Taxation of the investment portfolio held by North Media parent I would argue is taxable with taxation of realized gains, which should imply provision for deferred taxes on unrealized gains in the parent balance sheet [ie. like in Berkshire's group balance sheet]. I can't see such taxes provided for in the specification of the composition of the deferred taxes in the group balance sheet, so I may be wrong on that point though. I will make a call to the company on that point in due course and get back to you about it here.
« Last Edit: June 27, 2020, 12:25:37 PM by John Hjorth »
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