Bloomsbury: survival of publishers points to AI prophecy overkill

Absolutist predictions about the extinction — or dominance — of a product can persuade us to buy or sell a stock. But universally held views can also be wrong. This is worth remembering amid prophecies that generative artificial intelligence will take over the world.

Consider the success with which printed books have defied forecasts of their obsolescence. When Amazon launched its Kindle ereader in New York in 2007, publishers believed eBooks were the future.

It would only be a matter of time before eBooks accounted for at least half of book sales, they said. Since then, ebook sales have plateaued. More than 70 per cent of book sales in the UK last year by volume were print, according to Nielsen.

Publishers such as Bloomsbury, which sells the Harry Potter series, and Penguin Random House (PRH) have fought off other existential threats. These have included streaming, smartphones and myriad distractions that were supposed to supersede reading habits.

Bloomsbury’s full-year results this week suggest the publishing industry is still putting up a good defence. The London-listed group posted another year of record results. This was despite concerns that a reading revival triggered by pandemic lockdowns would fizzle out. Revenues and pre-tax profits both climbed 15 per cent to £264.1mn and £25.4mn in the 12 months ending February 28.

German media group Bertelsmann, the owner of PRH, said last month that the publishing house had a “strong” first quarter. It was helped by 4mn sales of Prince Harry’s headline-grabbing autobiography Spare.

Publishers are adapting to survive. A once-fragmented industry continues to consolidate, even though PRH’s proposed $2.2bn takeover of rival Simon & Schuster collapsed last year following antitrust objections. Bloomsbury, while far smaller, has been buying up independent rivals such as Head of Zeus.

Bloomsbury is working on expanding its higher margin non-consumer division. This encompasses academic and professional publishing as well as a “digital resources” business. The latter creates online research portals that can be accessed in return for a subscription — for example, a digital archive of former British prime minister Winston Churchill’s writing.

Revenues at Bloomsbury Digital Resources rose 41 per cent last year, which drove sales at its non-consumer business up 19 per cent to £97.4mn. Profits at the business increased 43 per cent to £13.1mn.

At its core consumer division, profits rose by a more muted 2 per cent to £18.1mn, with revenues up 12 per cent to £166.7mn. 

Other threats are on the horizon, which may explain why shares in Bloomsbury trade on a forward price/earnings ratio of about 15 times. This looks cheap compared with its five-year average of 17 times.

Publishers are among the industries threatened by generative AI (GAI). Bertelsmann boss Thomas Rabe is one of a number of chief executives who have tried to characterise GAI as more of an opportunity than a threat.

A bit of both, perhaps? New technologies sometimes wipe out old ones — think petrol cars versus horse carriages — but more often create a new market segment. Online news coexists with print newspapers, for example.

Shares in Bloomsbury have come down from their record high in November. But they have still outperformed the FTSE All-Share index in the past 12 months.

Publishers will doubtless sell plenty of books explaining how GAI will make them and practically everyone else redundant. Most readers will consume these in a form 15th century printer Johannes Gutenberg would recognise.

WE Soda provides a shot in the arm for London

Another market that has been fighting off predictions of its demise is the London stock market. It received a boost this week when Turkey’s WE Soda announced plans to list in the UK.

The flotation of the world’s largest producer of natural soda ash would underpin the London market’s core commodity franchise. A mooted valuation of $7.5bn would be big enough to make a difference to a bourse that has been losing important companies. These include CRH, the world’s largest buildings materials group, which is ditching its London listing for New York.

Soda ash is a low-value bulk commodity widely used in glass making and products such as washing detergents. Turkey, where WE is based, has competitive advantages for production. The country has large reserves of trona ore. Soda ash can be made from this mineral with half the energy required for synthetic production.

WE’s facilities sit at the bottom of the global production cost curve, supporting a premium price for the shares.

Turkish industrialist Turgay Ciner owns WE. He plans to sell a tenth of WE’s equity. His timing is opportune. Company earnings benefited from a boom in soda ash prices. This reflects soaring energy prices and pent up post-pandemic demand. Ebitda doubled last year to $838mn. 

The surge may be ending though. Construction demand is weakening and Inner Mongolia is adding to global supplies, according to Sebastian Bray of Berenberg. Chinese soda ash futures have fallen by two-fifths from a peak at the start of this year.

Even assuming WE’s ebitda can hit a billion dollars this year, the suggested multiple of 7.5 times is still a substantial premium to peers. Belgium’s Solvay trades at just under five times. 

Growth potential and high margins help justify the gap. WE plans to double output by 2030 by adding US capacity. A promised dividend yield of almost 7 per cent this year is another plus factor.

Institutional investors should, however, challenge WE’s claims to be a marginal supplier that can control the market. It is a point they should make in pricing negotiations. A decent debut for the shares would earn credit for both sides and encourage more foreign businesses to list.