The August 2018 pre-seen document focuses on Finch News Group, a company in the troubled newspaper business. The company's challenging market environment is reflected in their financial statements which we review below. Overall, the company's performance has been poor for quite some time with revenues and profits contracting substantially since 2013 at least. They will need to find new paths to revenue growth and/or significantly ramp up their digital ad and contract printing revenues, which still only represent 22% of the total revenues. Unfortunately, FNG is a little bit hamstrung when it comes to financing options, so they'll need to be creative if they want to make any big investments in the coming years.
The consolidated statement of profit or loss to the end of March 2018 points to a company struggling to adapt to the challenges to traditional print newspapers in the digital age. Revenue has declined by 8.2% since 2017, with the company's traditional print advertising and print newspaper sales declining by a combined B$31.6 million. FNG is trying to offset these losses from their traditional print revenue streams with digital advertising sales and their contract printing business, but at the moment they are too small to offset those losses. FNG still relies on print newspaper sales and print advertising sales for 78% of its revenues, so they clearly have a big problem, since print revenues are unlikely to rebound. The fact that FNG is likely under pressure from trade unions in Borland to avoid layoffs of journalists with good conditions, means that their other operating expense category is eroding the gross profits that the company is making. It may well be that while FNG's business is in decline, it is not able to layoff staff in response to this downturn, meaning that net profit is eroded by 78% compared to 2017. FNG now has net profit margins of just 0.4% and if current trends continue, the business will be loss-making in 2019.
It's notable that FNG's balance sheet is shrinking as they look to pay off creditors more quickly (payable days are down and gearing is down), they are not replacing PPE (down 37%), and they are holding cash rather than investing it. FNG seems to be taking a conservative financial approach, opting for liquidity (the current ratio is 1.7) and solvency (working capital has improved since 2017) in the light of limited investment opportunities in a contracting industry. The problem for FNG is, even if there was an abundance of investment opportunities they would not be able to take advantage given their limited financing options. In the last two years, they have chosen to reduce their long-term debt by over B$11 million. It's unlikely that they would want to take on more debt now all of a sudden to fund a big investment, and in any case their gearing ratio (long-term debt/equity) is still relatively high at 40%. An IPO is unlikely too as there are hints of a recession in Borland in the pre-seen and shareholders are likely to be largely indifferent about a newspaper floating given the poor industry outlook. The best option may lie with FNG looking into a private placement of shares by targeting wealthy individuals in Borland for example.
The statement of cash flows shows an increase of 85% in the cash position in the last year. Depreciation being added back as a non-cash item has a big positive impact of B$10.3 million, indicating the high capital investment requirements for traditional print newspaper businesses. This significant physical infrastructure is something many of the company's new technological rivals and substitutes live without of course, giving them significant cost advantages over traditional print businesses like FNG. It's also interesting that FNG's shareholders (led by 8 Finch family members) have taken a dividend of B$3 million in 2018 which exceeds the B$1 million net profit figure. It's clearly unsustainable for this practice to continue as it means that the shareholders are tapping into the company's reserves to pay themselves, depriving FNG of the ability to invest.
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