OREANDA-NEWS. Fitch Ratings has affirmed UK-based Daily Mail and General Trust's (DMGT) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable.

The ratings reflect a balance between the cash-generative capability of DMGT, the active management of its business portfolio and a meaningful exposure to print circulation and print advertising that is in structural decline. DMGT continues to effectively transition its business portfolio to reduce this exposure and increase the contribution from higher-growth markets, digital products and B2B assets. The rating and operating profile of the group are supported by some well-positioned B2B assets and a measured financial policy that targets net debt-to- EBITDA up to 2.0x (as defined by DMGT).

Weakness at magazine Euromoney and investments in new product development, digital platforms and early-stage businesses are likely to continue to weigh on operating margins and cash flows in the short-term. As a consequence, we expect DMGT's funds from operations (FFO) adjusted net leverage to remain broadly stable in the financial year to September 2016 (FY16) at 2.8x, after assuming some reduction in the company's share buy-back programme.

KEY RATING DRIVERS
Diversified Revenue Mix
DMGT has continued to improve its business mix by growing B2B services and revenues from international operations. This has enabled the group to reduce its dependence on its cyclically exposed and declining print business within its national newspaper division while increasing the proportion of revenues from subscriptions, digital platforms, transactions and events which have either greater visibility or growth prospects. At end-FY15 B2B accounted for 60% of group revenues, up from 45% in FY11 while non-UK revenues have grown to 49% from 35% over the same period.

dmg-media Managing Structural Decline
While DMGT has successfully reduced its exposure to its national newspaper business over the past decade, the group still derives a significant 30% of group revenues from print advertising and circulation which are in structural decline as content is increasingly accessed in digital forms. Revenues from print circulation and advertising within dmg-media have declined by 33% since 2010. DMGT has been able to offset some of the declines by growing its digital advertising revenues and reducing costs. While this is helping to stabilise operating margins of the division at around 13%, we expect the top line to continue to decline by 2% to 3% per year over the next three years.

Short-term Margin Pressure to Continue
DMGT's operating margins weakened by one percentage point in FY15. We expect this trend to continue into 2016 as result of product development within two of its core divisions, dmg-information and RMS, negative contribution from early-stage businesses and weakness at Euromoney. We believe operating margins are likely to improve from 2017 as the group begins to grow revenues from new products and improve the maturity of its early stage businesses while stabilising declines at Euromoney. We remain cautious on the extent of margin expansion due to a lack of visibility on the potential success of the new products and likely investment in new, early stage businesses.

FCF Generation Visibility Affected
DMGT had a robust pre-dividend free cashflow (FCF) margin of 8% in FY15, which we believe is sustainable in the short-term. However, visibility to cash flows in the medium- to long-term is, however, impacted by uncertainties in the evolution of print circulation and print advertising, the likely need for continued investments in new products and digital platforms and the active management of portfolio.

There is scope for the FCF margin to strengthen over the next three years, depending on the success of its new products and early-stage business investments. The cashflow generation is supported by fairly low cash tax payments and provides DMGT with significant financial flexibility in manging operational risks, investing for growth and optimising its capital structure.

We expect the group to use approximately half of its FCF to pay dividends, and the remainder towards M&A and share buybacks. As a result we envisage that DMGT's FFO adjusted net leverage in FY16 will remain stable at 2.8x, assuming a slight decrease in share buybacks relative to 2015. This will retain a 0.7x leverage headroom in the current ratings. DMGT targets leverage up to 2.0x net debt to EBITDA (FY15: 1.8x).

Active Portfolio Management
Acquisitions and divestments continue to play a central role in the group's strategy to grow its digital business and diversify internationally. Between FY09 and FY15, DMGT made GBP604m of acquisitions and GBP835m of disposals helping to deleverage. We expect the group to continue using these inorganic means, particularly to leverage against growth markets, client databases, brands and digital media.

DMGT's disciplined approach to M&A has recently been successful. However, it is not without risk, particularly if deployed outside existing business lines. The approach also makes it more difficult to envisage the nature of DMGT's core, long-term business portfolio and operating risk profile.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- A decline in dmg-media circulation revenues of 5% per year and a slower decline in print advertising revenues to 5% in 2019 from 8% in 2016.
- Group revenue growth of 1.7% in FY16 slowing to around 1% per year thereafter
- Group operating EBIT margin contracting to 14.6% in FY16 from 15.6% in FY15 before gradually rising to 16% by FY19.
- A stable capex-to-sales ratio of 4.7%
- A share buyback programme of GBP75m in 2016 and 2017, increasing to GBP90m in 2018 and 2019.
- No significant debt held above the Daily Mail and General Trust Plc level.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage persistently trending above 3.5x, a metric that Fitch expects to correlate approximately to 2.5x net debt-to-EBITDA (based on DMGT's definition which includes share of JVs and associates).
- Operational weakness driving sustained declines in EBITDA and FCF.
- A change in financial or dividend policy leading to new, higher leverage targets.

Positive: An upgrade would only be possible once there is greater visibility and confidence in DMGT's medium- to long-term operational and cash flow profile, including greater clarity and success of the digital transition in consumer and businesses such as RMS in B2B have proven the revenue (and margin) potential of the new platform roll-out.