The value of the publisher of the Daily Mirror and Daily Express newspapers plunged by a quarter on Tuesday after it warned that inflationary pressure and soaring newsprint costs would hit profits this year.
The London-listed publisher Reach, which also owns 200 regional print and digital titles, including the Manchester Evening News and Liverpool Echo, warned that it expects to see a “modest” drop in operating profits this year.
“This is not a profits warning,” said Jim Mullen, the chief executive. “This is a moderation in profits due to inflation.”
Shares fell 25% to 169p after the guidance was announced, wiping about £180m from the company’s market value.
The company said that the existing issue of rising newsprint costs, due to growing distribution costs and supply issues, is now being affected by a “significant” increase in energy prices. Newsprint costs rose from £45.8m to £52.9m last year.
“The impact from inflation, which began to affect the business towards the end of 2021, has now intensified, particularly in print production,” the company said. “This has primarily been reflected in the cost of newsprint … which is being heavily impacted by rising energy costs. We expect this to continue in 2022.”
The forecast of reduced profits this year, after a healthy rise to £143.5m last year from £131.3m in 2020, means the company is not able to completely offset the rising costs with savings plans.
Mullen would not comment on whether the company would raise the price of its papers or cut jobs this year as a result. Reach hired 400 new editorial staff last year, taking its total employee base to 5,200, with more than half in journalist roles.
Labour costs rose from £217m to £232m last year, although the company will realise significant savings from a move to permanently close 30 offices last year to allow staff to work from home permanently, which it said reflected the wider change in post-pandemic office culture.
Mullen pointed to the growing success of its digital operation, which grew by a quarter last year to £148.3m and more than offset the decline in print income, pushing total revenues up 2.6% to £615.8m in the first like-for-like growth since 2007.
“We expect [the situation] to moderate regarding the inflationary pressures we have had,” he said. “Three years ago this would have been fairly significant. But we are seeing digital growth more than cover the decline in print.”
Reach’s print business, which Mullen said has “at least” 20 years of significant cash generation in it, saw income from advertising and circulation revenues drop by 4.7% to £454.5m. While still the dominant income stream, accounting for 74% of total revenues, Mullen said the company is on track for digital income to hit £238m by 2024 – double the 2020 level.
Mullen, the former boss of Ladbrokes Coral, joined Reach in 2019 when its share price was 89p. The company, which hit a year-low on Tuesday as investors reacted to the profit forecast, closed at 227p on Monday.
Analysts at Peel Hunt forecast that Reach’s profits for this year will dip to £134.3m. “We feel the downside from here is now limited,” said analyst Malcolm Morgan.