TF1 is one my watch list for some time now. I have resisted adding it because I wanted to learn more about the company and especially the management.
Let us first look at the business TF1 is in.
TF1 is an integrated media group which offers free (TF1, TMC, NT1) and paid TV channels (Eurosport, TV Breizh, LCI, TF6). Its activities now span the entire range of industry. It does film production, acquisition and trading of audiovisual rights, movie distribution, sale of commercials, and also DVD and music CD publishing. Growing through the internet by publishing new interactive content and services on the web is among the priorities of the group.
We first recognize the source of revenue for the business. Broadcasting France includes all the TV channels except Eurosport. Eurosport comes under Broadcasting International. Broadcasting France also includes film productions, internal productions like Danse avec le stars and fully owned subsidiary Metro France, the first free daily newspaper in France. Metro is the second rank national daily with 2.4 million readers.
During the course of its business TF1 has ended up with rights to a lot of TV dramas and movies. It has now more than 4000 programmes which it acquired for France and other countries. It is responsible for distributing these programs through VoD, publishing via traditional networks like Kiosks and digital channels. TF1 has been a pioneer in offering a digital copy of programmes on some DVDs giving consumers a digital and legal copy of the program for their computer and portable media players.
TF1 is the flagship free tv channel offered by TF1 Group. Its 24% market share makes it the most popular domestic channel in France. After ITV1 lost its title of the most viewed television channel in Europe, TF1 is considered as the current owner of that title. A large portion of the schedule consists of game shows, documentaries and dubbed version of television series. Flagship shows include CSI, House MD and The Voice.
More than half of all revenue comes from the advertising on TF1 channel i.e., €1,504m in 2011 out of total revenue of €2,619m.
If we look at the the channel than we see a decline year after year in the market share and viewings. The audience share of pre-existing broadcasters have fallen because of arrival of 12 new competitors. But the television viewing hours in France has set a new record in 2011.
The business is quite profitable with an average net margin of 8% in the last 7 years. The company has a good RoIC and has a very strong balance sheet.
In 2010 the result included non-current operating income of €83m due to the remeasurement of previously held equity interest in TMC and NT1. If we take this into account than the EPS as well as the net result has been going up.
One picture suffices in showing how good the balance sheet is !
The current net debt (=total debt - cash) is €41m as compared to €1,587m in equity.
TF1 is a very shareholder friendly company. They have paid a major part of their earnings as dividend every year. The average payout has been around 60%. The 2011 dividend of €0.55 is a 8.2% yield on today’s share price of €6.5.
How much will you pay for a company with no debt (well €41m), with RoIC around 12%, revenue of €2.6b, net margin of 8%, upward trending EPS of €0.8 and a shareholder friendly management with dividend of €0.55 ? You should also consider that the company holds for a long time the number one position in the market it is in with nearly 24% market share. A P/E of 12 will be cheap in my opinion for such a company. This is €9.6 per share and offers a 50% upside from the current prices.
The Long Case
I hope you see the opportunity here, as I do. You have a leading TV channel with 24% market share in France. The company is financially very stable with no debt. There has been short term scare in the market because of declining market share due to new competitors entering the market. The scare has been so big that the company is yielding nearly 9% in dividends.
I see this as a very good opportunity to deploy some cash. But I want to research the management and the risks first. So far, we have a very compelling case but given that France is notorious with government regulations (the annual report points out that TF1 cannot expand by acquiring other companies because that will make it “too big” in the eyes of the French regulators). I have yet to figure out how that effects this company. It saddens me to see the government interfering in Peugeot’s business (my earlier pick in France) because firing some people to make them competitive does not look so good for the government.