2 Bucks, page-9

Spendit

You seem a little quick to rubbish justinp's theory, but I notice you haven't addressed the pertinent issue Justin raised of whether SWM is in a long-term structural down trend. An issue well publicised by both the investment community and mainstream press.

My view on SWM is not exactly positive. So, let me formally state, for the record, my intention is to discuss the stock and debate differing investment opinions. I am not on here for the purpose of 'getting a reaction'. Actually, if you search my posting history you'll see that not that long ago (maybe a year or so) I was a holder of SWM.

The last five half yearly accounts show a clear and concerning trend in revenues:
Dec-12: (3.67%)
Jun-13: (4.06%)
Dec-13: (1.07%)
Jun-14: (1.08%)
Dec-14: (3.36%)

I always thought the newspaper business had some serious issues, but I thought that increasing FTA advertising revenues would be enough to offset that. Around Dec-13 it looked like FTA advertising revenues were stabilising, but alas from there the decline started to accelerate again. Despite SWM increasing their percentage of the FTA advertising market share to over 40%, their overall advertising revenue has been decreasing. A very worrying trend indeed. I can't help but think the on-demand and online advertising will only accentuate this trend.

The decline in revenues were partly offset over previous financial years by a concerted cost cutting effort by Voelte. These were effective in softening the blow of declining revenues, but it's not a long-term strategy and I'm not sure how much more the cost base can be streamlined, given the Dec-14 results actually showed an increase in costs.
Dec-12: 1.80%
Jun-13: (5.75%)
Dec-13: (0.93%)
Jun-14: (2.57%)
Dec-14: 4.59% **
* Figures exclude redundancy/restructuring and financing costs
** I have included onerous contracts expense. I find it odd that management have chosen to highlight what should really be called a 'bad management' expense.

The only meaningful expense reduction achieved over the past few years is a reduction in interest expense, which has reduced over 40% over the past five halves. I can't imagine why management would continue to pay out high dividends and dilute the shareholders (as a result of a mechanism of the CPS structure) when the cash would be better spent reducing debt. I think I've harped on enough about the CPS' enough in previous posts, so I'll leave that alone.

I find it easy to make a 'buy' case for SWM, on the basis that it looks cheap on current valuation metrics. The problem is, if the current earnings decline continues those same metrics will eventually start to look expensive. The only way I see for SWM to increase the share price is to decrease the enterprise value via debt reduction. I see the board's preference of maintaining a high dividend yield over increasing the value of the company as short sighted and a mistake.

Regards
Gralynchett