Venture: Small-cap Industrial
Issue 24;
Read all about it.
Smiths News (SNWS)
“Smiths News is the UK’s leading newspaper and magazine wholesaler.”
I recently met a major shareholder, Blake Nixon, the manager of the Worsley Trust (WINV), which has a 4% stake in Smiths News. He is an activist value investor and highlighted this opportunity that he has backed.
SNWS is the largest distributor of print media in the UK, in a market that is effectively a duopoly alongside Menzies, spilt 55/45. Not only do they deliver, but they also collect returns and provide data to minimise waste. Their 35 depots operate 24/7, and they are specialists in their field.
Founded in 1792, the company was renamed WH Smith in 1828, which was spun off in 2006. SNWS acquired Bertram Books in 2009 along with The Consortium and Tuffnells, and later sold them all again in 2020 to focus on Smiths News as it stands today.
The business is built on long-term, cash-generative contracts with high barriers to entry. The company focuses on efficiencies and paying high dividends. They haven’t yet bought back shares but are in a strong position to do so.
Not to miss the obvious, newspapers are in decline, but if you look at their prices, you’ll be shocked. This is largely revenue to SNWS and the printers. Midweek per day: FT £3.50, The Telegraph £3.00, The Times £2.80, The Guardian £3.00, The Racing Post £4.90. Weekly total including Sundays: FT £22.60, The Telegraph £22.00, The Times £21.50, The Guardian £23.00, The Racing Post £34.60
While volumes have fallen and newspapers have become thinner, revenues have held up, meaning the expected decline in SNWS revenue has been below expectations. In addition, the long-term nature of the contracts provides visibility for most of the revenue until 2029. With management focusing on annual efficiencies, cash flow is maintained. It implies that the company has a long-term value, which is not priced in, and in Nixon’s view, that is significant.
SNWS is more or less free of debt, and last year generated £21.8m of free cash flow, on £1,019.9 million of sales. With a market cap of £126 million, that equates to a 17% free cash flow yield. The shares trade on a PE of 4.4x and a dividend yield of 8.1%. That’s cheap.
The next set of interim results will be published next Thursday, 2nd May. In their last trading statement:
“the Company has secured contract renewals across 74% of our current publisher revenue streams to at least 2029, underpinning revenues in the medium-term, alongside continuing to secure additional national and regional contract awards. In October 2023, the Group announced it had secured contracts for the distribution of the Midlands News Association regional press titles, and for newspaper distribution of News UK titles in the Group’s excising London territories. All new contracts have commenced and are fully integrated into the Group’s established UK footprint.”
Jonathan Bunting, CEO, stated, “the Group remains on track to deliver financial results in line with market expectations for the year.”
Smiths News Share Price
The share price is 51p, and the two brokers, Berenberg (60p) and Canacord (85p) (average 72.5p), imply a 40% upside. Major notable shareholders include Aberforth and the value fund Silchester.
This is an interesting value opportunity. It is very clear that the underlying industry is in decline, but that is less rapid than expected and transparent for years yet. It has the potential to surprise.
But it hasn’t escaped my attention that we hold WH Smith (SMWH) in the Whisky Portfolio, meaning if you buy this, you are going back to the corporate strategy of 1828. We also hold Smith and Nephew (SN), but I suppose that is irrelevant.
Risk
The shares trade with volatility around 30% and have liquidity of approximately £150k per day. The underlying business has long-term contracts, cash generation and a clean balance sheet. The business is therefore medium risk, but the low liquidity makes it medium to high risk.
Venture Update
PLUS has broken out to an all-time high (since 2018). It now seems likely it will reach the broker’s target.
SDY and FSH are rallying again; be patient.
Mobico (MCG) gave a downbeat statement in the year-end results. They grew revenues by 12% but saw lower profits due to higher costs and exceptionals. It is a large company trading at a low price, and most analysts have kept their target price above 100p despite two downgrades. I believe it is stable and will recover. I reiterate my original note:
“This is a simple business with a weak balance sheet… It’s a binary situation. Either the shares double, treble, or more, or it fails. Mobico is high-risk.”
RWS has already seen a staggering derating. The figures for the first half reported revenue down 4% and profits down 20%. Analysts matched the downgrades but reiterated the low valuation. RWS has a strong balance sheet, trades on a 7x PE with a 7.5% yield. The valuation is compelling.
Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.
Many thanks,
Charlie Morris
Editor, Venture
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