Fitch Arms DMGT at 'BBB-'; Stable Outlook

04 MAY 202 1

Fitch A           rms DMGT at 'BBB-'; Stable Outlook
Fitch Ratings - London - 04 May 2021: Fitch Ratings has a rmed Daily Mail and General Trust plc's (DMGT)
Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.

The rating takes into account management's portfolio approach to a mix of B2B and consumer businesses.
The portfolio has gone through considerable change in recent years with B2B businesses sold at high
valuations and management making relatively small acquisitions of well performing (mainly) consumer
titles where it believes it can apply digital expertise to release untapped performance. With a nancial
policy focused on cash operating income (EBITDA less capex) this approach has created shareholder value
and balance sheet strength, without distorting the business mix of cash ows.

Elements of the portfolio, e.g. print advertising, events and UK property, are cyclically (and in the case of
print structurally) exposed, but we expect solid recovery prospects once the worst pandemic conditions
have passed. Our base case is for stable to low single digit growth and modest margin expansion from
2022. Business scale that has materially reduced over the past four years continues to support the rating,
although further reduced scale or M&A that materially change the business mix or margin pro le could
pressure the rating.

Key Rating Drivers

Investment Silos, M&A to Continue: DMGT's portfolio approach leads to some volatility in terms of the
medium-term scope of the business. The most recent disposal of EdTech removed a solid growth B2B
business from the group. Management has said there are no businesses immune from disposal, but Fitch
views a wholesale disposal of Consumer Media unlikely, given the structure of the industry.

A siloed investment approach is focused on predictable performers, growth businesses and early-stage
investments. In Fitch's view, bolt-on deals are more likely in the rst two silos, providing some assurance
over the broad shape of the nancial, if not the exact business mix, of the group. Fitch expects M&A to
continue and that acquisitions are more likely than disposals, although the latter cannot be discounted. We
do not view the risk of a transformational deal to be high.

Incubator Investments; Performance and Risk: The rating construction focuses primarily on the
consolidated group and in Fitch's view, the portfolio is performing well, despite a degree of cyclicality. A
secondary but important driver is the scope and performance of management's incubator-type
investments; where it takes a minority or joint venture stake in early stage businesses. Notable outcomes
have been the group's investment in UK online property platform, Zoopla, and more recently the planned
US listing of Cazoo, an online used car sales platform. Both have achieved high public valuations, with the
UK listing of Zoopla generating signi cant cash proceeds for DMGT.

Fitch recognises that these investments represent equity risk and upside but it is important that
management takes a cautious approach in limiting the scale of individual investments. We note that DMGT
has shown judgement in the businesses invested.

Perimeter Scale: As well as smaller disposals in recent years, DMGT has spun-o its majority stake in
Euromoney, and sold its energy information and EdTech divisions. It has made bolt-on acquisitions such as
the "i" and New Scientist. This has reduced the scale of the business perimeter. Reported revenues have
reduced from GBP1.7 billion in the nancial year to September 2017 to a Fitch forecast of GBP1.1 billion
and EBITDA approaching GBP130 million in FY21.

Perimeter Mix: The portfolio approach provides a mix of businesses with di ering growth and margin
pro les. Consumer media includes the Mail newspapers and their adjacent online platforms, as well as
Metro, "i" and New Scientist. Newspapers continue to face long-term structural decline; the pace of which is
proving slower than previously expected, while management has proven e ective at developing titles
online. Consumer accounted for 54% of revenues in FY20, up from 50% in 2017. If we treat FY20 as an
aberration given the ampli ed cycle e ects of the Covid-19 pandemic, the cash operating income mix is
about 60% B2B; 40% consumer. We view this mix as supportive of the rating.

Cyclicality and Investment Grade Limits: Consumer, events and the UK part of the property division are
cyclically exposed. We expect stable to low single digit growth at the group level and operating margin
expansion from low-double digit levels over the medium term. The forecast nancial pro le continues to
support a low-investment grade rating. In general, we are unlikely to view businesses with an EBITDA below
USD100 million as investment grade. This implies that management has limited scope to further reduce the
scale of the business and remain investment grade.

Performance During Pandemic: In FY20 subscriptions, circulation and digital adverting accounted for two-
thirds of revenues. These business streams have been somewhat resilient to business disruption and
cyclical downturn. Revenues from events, print advertising, transactions and other have been materially
a ected by the pandemic. Underlying revenues were down 10% in FY20 (encompassing seven months of
pandemic conditions), with print advertising down an underlying 30% and events down 35%. A exible cost
structure and post-pandemic prospects in the UK and US suggest stable performance in 2021. However,
2020 performance was comfortably better than Fitch's rating case.

Balance Sheet Strength, Financial Policy: DMGT's debt position turned net cash in 2018 following the
Euromoney disposal and has remained so (on a reported basis) since. Net cash (excluding IFRS16 leases) at
December 20 stood at GBP55 million/gross cash at GBP255 million. The EdTech disposal (for about USD410
million), which is now closed, will further add to the position.

The company's nancial policy includes a leverage cap of net debt/EBITDA of 2x (as calculated by DMGT),
providing scope for sizeable M&A. Fitch views DMGT's investment style to be relatively cautious. A
downgrade threshold of 1.5x funds from operations net leverage approximates to Fitch-de ned net
debt/EBITDA of 1.1x. Leverage maintained at the policy cap would put pressure on the rating.

Derivation Summary

DMGT's credit pro le is supported by the group's B2B and consumer media portfolio, measured nancial
policy and balance sheet strength providing the exibility to manage operational risks. However, medium-
to long-term visibility of cash ow is a ected by uncertainties in the evolution of print circulation and
advertising, the likely need for continued investment in new products and digital platforms. The company's
active management of its asset portfolio leads to more limited visibility over the scale and scope of the
business. These factors have in uenced a more cautious approach to setting rating thresholds for the 'BBB-
' rating.

Higher-rated larger peers with greater leverage exibility such as RELX PLC (BBB+/Stable) and Thomson
Reuters Corporation (BBB+/Stable) have a higher proportion of subscription-based revenue, little/lower
exposure to print, and bigger discretionary cash ows that support higher leverage or ratings.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue to decline in FY21 by 7.9% following the disposal of Hobsons and continued pressure in the
events and media businesses. Thereafter we expect a recovery of 6.5% in FY22 followed by low single digit
growth thereafter.
- EBITDA margins to decline to 11.3% in FY21 before steadily increasing toward 14.5% by FY24.
- Slightly negative working capital at around -1% of revenue per year between FY21 and FY24.
- Capex intensity of around 1.6% in FY21 growing steadily to 2.0% by FY24.
- Dividends are expected to grow at 3% per year.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action is unlikely in the medium term until we have improved free cash ow (FCF) visibility
with diminishing execution risks.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A downgrade is likely if we do not see a more stable performance by DMGT's B2B portfolio. Visibility and
stability of FCF from the B2B portfolio is key to DMGT maintaining an investment-grade rating.

- FFO net leverage sustained above 1.5x, correlating to around 1.1x Fitch-de ned net debt/EBITDA.

- Pre-dividend FCF margin below 5% on a sustained basis.

- Weakening consumer division operating pro t trends, given the importance of the consumer transition to
online in the context of a declining print news industry.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade
scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three
notches over a three-year rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th
percentile of rating transitions, measured in a negative direction) of four notches over three years. The
complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to
'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information
about the methodology used to determine sector-speci c best- and worst-case scenario credit ratings, visit
https://www. tchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: At December 2020, the company reported net cash of GBP55 million. We expect the
company to continue to generate low single digit FCF margins from FY21 to FY23. The disposal of Hobsons
in March 2021 for about USD410 million will further improve liquidity and support a strong closing cash
position in the full year to September 2021. Fitch-adjusted cash at September 2020 was GBP387 million
after excluding restricted cash of GBP114 million. This relates to cash made available to the pension
scheme following the distribution of its shareholding in Euromoney

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This
means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their
nature or the way in which they are being managed by the entity. For more information on Fitch's ESG
Relevance Scores, visit www. tchratings.com/esg

Fitch Ratings Analysts

Stuart Reid
Senior Director
Primary Rating Analyst
+44 20 3530 1085
Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN

Tom Steabler, ACA
Director
Secondary Rating Analyst
+44 20 3530 1661

Damien Chew, CFA
Senior Director
Committee Chairperson
+44 20 3530 1424

Media Contacts

Adrian Simpson
London
+44 20 3530 1010
adrian.simpson@the tchgroup.com

Rating Actions

ENTITY/DEBT        RATING                                                 RECOVERY          PRIOR

ENTITY/DEBT       RATING                                             RECOVERY          PRIOR

 Daily Mail and
 General Trust     LT IDR           BBB-             A rmed                             BBB-
 Plc

         senior
                   LT               BBB-             A rmed                             BBB-
         unsecured

RATINGS KEY OUTLOOK WATCH
POSITIVE

NEGATIVE

EVOLVING

STABLE

Applicable Criteria

Corporate Rating Criteria (pub.21 Dec 2020) (including rating assumption sensitivity)

Corporates Recovery Ratings and Instrument Ratings Criteria (pub.09 Apr 2021) (including
rating assumption sensitivity)

Applicable Models

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing
description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

Additional Disclosures

Solicitation Status

Endorsement Status

 Daily Mail and General Trust Plc   UK Issued, EU Endorsed

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