Reach sees 'modest' hit from newsprint inflation

Daily Mirror publisher Reach said higher newsprint inflation would result in a 'modest' hit to 2022 operating profit as it reported a rise in annual earnings last year.

The company on Tuesday reported a 9.2% rise in adjusted operating profit to £146.1m for the year to December 26. Revenue rose 2.6% to £615.8m. Investors took a more pessimistic view of the outlook and marked the shares down by almost a quarter.

Reach, which is shifting its focus to digital output, said the impact from inflation, which began to affect the business towards the end of 2021, had intensified, particularly in print production as print costs rose to £53m from £46m.

“This has primarily been reflected in the cost of newsprint, which having previously been impacted by rising distribution costs and supply challenges, now also reflects the significant increase in energy prices. As a result, the gross impact of inflation in 2022 is expected to be higher than in recent years,” the company said.

“While ongoing efficiencies are expected to partly mitigate this impact, we anticipate the net effect to be a modest year-on-year reduction in operating profit as we continue to invest for the future. We expect digital revenue growth to again offset print decline, with total revenue flat for the full year 2022."

Peel Hunt analysts said they expect the inflation hit to see pre-tax profits drop 6% to £134.3m this year.

“We feel the inflationary impact may well endure, so impacting 2023 as well, though further cost-saving measures will surely be brought to bear,” they wrote in a note, but added that the downside from here was "limited".

Reach, which also publishes the right-wing Daily Express, said the higher newsprint cost reflected cuts in industry capacity and a surge rebound in demand after the height of the Covid pandemic.

"Growing demand for packaging materials, reduced availability of recycled fibre and increasing costs of shipping and energy contributed to a significant increase in newsprint prices versus 2020," it added.

Brokers at Numis rated the shares a 'buy' but cut adjusted operating profit estimates to £138.7m from £149.8m, with adjusted earnings per share of 35.5p compared to 38.5p, given a "backdrop of significant print cost base inflation, and assuming no cut to investment".

They also lifted 2022 revenue forecasts to £615.8m from £608.9m based on "a strong 2021 revenue that is better than modelled, and confident outlook, particularly with regards to digital momentum".