Smiths News — Contract renewals cement future cash flows

Smiths News (LSE: SNWS)

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Research: Industrials

Smiths News — Contract renewals cement future cash flows

Smiths News announced yesterday that it has secured its fifth major publisher contract renewal with News UK & Ireland, publisher of The Sun, The Times and The Sunday Times. This follows new five-year agreements with Associated Newspapers, Telegraph Media Group (TMG), Frontline and Seymour Distribution, which collectively account for 65% of current newspaper and magazine revenues. We expect additional contract renewals to be secured in the next year. These renewals bolster the company’s cash-generative business model, providing a steady stream of revenue up to 2029/30. Our valuation remains unchanged at 89p, representing 78% upside to the current share price.

Natalya Davies

Written by

Natalya Davies

Analyst

Industrials

Smiths News

Contract renewals cement future cash flows

Contract renewals

Industrial support services

13 April 2023

Price

50p

Market cap

£123m

Net debt (£m) at end FY22

14.2

Shares in issue

247.7m

Free float

88.5%

Code

SNWS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(10.7)

43.4

Rel (local)

(0.5)

(10.4)

42.1

52-week high/low

58p

28p

Business description

Smiths News is the UK’s largest newspaper and magazine distributor with a c 55% market share covering 24,000 retailers in England and Wales. It has a range of long-term exclusive distribution contracts with major publishers, supplying a mix of supermarkets and independent retailers.

Next events

Interim results

3 May 2023

Analysts

Natalya Davies

+44 (0)20 3077 5700

Andy Murphy

+44 (0)20 3077 5700

Smiths News is a research client of Edison Investment Research Limited

Smiths News announced yesterday that it has secured its fifth major publisher contract renewal with News UK & Ireland, publisher of The Sun, The Times and The Sunday Times. This follows new five-year agreements with Associated Newspapers, Telegraph Media Group (TMG), Frontline and Seymour Distribution, which collectively account for 65% of current newspaper and magazine revenues. We expect additional contract renewals to be secured in the next year. These renewals bolster the company’s cash-generative business model, providing a steady stream of revenue up to 2029/30. Our valuation remains unchanged at 89p, representing 78% upside to the current share price.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/21

1,109.6

31.9

11.3

1.5

4.4

3.0

08/22

1,089.3

32.3

11.7

4.2

4.3

8.4

08/23e

1,056.6

33.1

11.0

4.2

4.5

8.4

08/24e

1,024.9

33.5

10.8

4.2

4.6

8.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Contract renewals underpin attractive valuation

The current year has started well, with contracts representing 65% of newspaper and magazine sales revenues renewed until 2029/30, underpinning the sustainability of the business in the long term. These contracts include Frontline and Seymour (c £180m revenue pa, c 19% of newspaper and magazine revenues), Associated Newspapers (c £155m pa, c 16%), TMG (c £105m pa, c 11%) and News UK & Ireland (c £182m pa, c 19%). These deals are a key endorsement of the UK magazine market and Smiths News’ position within it as the UK’s foremost route to market. Other discussions with leading UK publishers are ongoing and we would expect the company to continue to secure additional contracts before the end of the current contract period.

Resilient business model in challenging times

Despite current economic volatility and inflationary pressures, the combination of sustained margin mix and tight cost control provides confidence that the group will maintain its strong performance in FY23. As mentioned in our last note, our expected 3% revenue decline in FY23 to £1,056.6m takes Smiths News back to the lower end of its average pre-COVID decline (2015–20) of 3–5% pa. We estimate that net debt will decrease significantly from £14.2m in FY22 to £2.6m in FY23, implying a healthy leverage ratio of 0.06x. We expect FY23 EBITDA to increase modestly to £43.2m, generating a margin of 4.1%. At end FY22, the balance sheet has distributable reserves of £118.7m to allow for future dividend payments.

Valuation: DCF valuation unchanged at 89p

Our DCF valuation of Smiths News remains unchanged at 89p/share, representing 78% upside to the current share price. The company trades on P/Es of 4.5x in FY23e and 4.6x in FY24e with a yield of 8.4%, which we believe is attractive for a company with such cash-generative characteristics. We will publish revised forecasts following the interim results, set to be released on 3 May.

Positive sentiment in light of contract renewals

Secured contracts see a surge in share price

The current year has started well, with contracts representing 65% of newspaper and magazine sales revenues renewed until 2029/30, underpinning the sustainability of the business in the long term. On the back of this encouraging news, it is positive to see investor sentiment turning, with a more than 50% increase in the share price in the last six months. Since the end of FY22, the group has announced that it has signed the following newspaper and magazine contracts:

Frontline (the UK’s largest magazine distributor) and Seymour (part of Frontline Group and the UK’s largest independent magazine distributor). These contracts cover all of Smiths News’ current distribution territories in the UK from 2025 to 2030, representing revenue of c £180m pa at current values. The two customers account for c 50% of the UK magazine market.

Associated Newspapers, publisher of the Daily Mail, The Mail on Sunday, i newspaper and New Scientist. This new agreement covers all of the group’s existing territories with Associated Newspapers and represents revenue of c £155m pa at current market values.

Telegraph Media Group, publisher of the Daily Telegraph and Sunday Telegraph. The contract has been renewed up to 2029, representing c 11% of newspaper and magazine revenues.

News UK & Ireland, publisher of The Sun, The Times and The Sunday Times, representing c 19% of current newspaper and magazine revenues.

Exhibit 1: Contracts by publisher and expiry

Source: Smiths News

Valuation of 89p presents plenty of upside potential

Our DCF valuation remains unchanged at 89p/share, representing 78% upside to the current share price of 50p. Smiths News trades on a P/E of 4.5x in FY23e, with a yield of 8.4% and the prospect of special dividends to bolster the yield as debt falls. In our experience, when ‘safe’ dividend yields exceed P/E ratios in absolute terms, it indicates a value opportunity. We will revise our forecasts following the interim results, due to be released on 3 May.

Exhibit 2: Financial summary

£m

2019

2020

2021

2022

2023e

2024e

Year end 31 August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,303.5

1,164.5

1,109.6

1,089.3

1,056.6

1,024.9

Cost of Sales

(1,217.5)

(1,091.4)

(1,036.2)

(1,016.6)

(985.2)

(954.8)

Gross Profit

86.0

73.1

73.4

72.7

71.4

70.2

EBITDA

 

 

60.1

40.4

44.9

42.9

43.2

42.9

Normalised operating profit

 

 

44.0

35.4

40.6

39.3

39.3

39.0

Share-based payments

(0.4)

(0.3)

(1.0)

(1.2)

(1.2)

(1.2)

Total adjusted operating profit

43.6

35.1

39.6

38.1

38.1

37.8

Amortisation of acquired intangibles

(0.1)

(0.2)

0.0

(4.4)

0.0

0.0

Exceptionals

(7.2)

(7.8)

(1.9)

(2.5)

(1.0)

(1.0)

Impairment

0.0

(6.0)

(1.6)

1.2

0.0

0.0

Other financial costs

0.0

0.9

3.5

2.5

0.0

0.0

Other

0.0

0.0

(0.3)

0.0

0.0

0.0

Reported operating profit

36.3

22.0

39.3

34.9

37.1

36.8

Net Interest

(6.0)

(7.2)

(8.7)

(7.0)

(6.2)

(5.5)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

38.0

28.2

31.9

32.3

33.1

33.5

Profit Before Tax (reported)

 

 

30.3

14.8

30.6

27.9

30.9

31.3

Reported tax

(8.4)

(2.8)

(4.3)

(4.5)

(6.8)

(7.8)

Profit After Tax (norm)

29.6

25.4

27.6

27.8

26.3

25.7

Profit After Tax (reported)

21.9

12.0

26.3

23.4

24.1

23.5

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

(53.4)

(18.7)

(0.1)

0.0

0.0

0.0

Net income (normalised)

29.6

25.4

27.6

27.8

26.3

25.7

Net income (reported)

(31.5)

(6.7)

26.2

23.4

24.1

23.5

Basic average number of shares outstanding (m)

246

245

244

239

239

239

EPS - basic normalised (p)

 

 

12.01

10.39

11.33

11.66

11.03

10.76

EPS - diluted normalised (p)

 

 

11.98

10.28

10.83

11.03

10.53

10.28

EPS - basic reported (p)

 

 

(12.78)

(2.74)

10.76

9.81

10.11

9.84

Dividend (p)

1.00

0.00

1.50

4.15

4.15

4.15

Revenue growth (%)

N/A

(10.7)

(4.7)

(1.8)

(3.0)

(3.0)

Gross Margin (%)

6.6

6.3

6.6

6.7

6.8

6.8

EBITDA Margin (%)

4.6

3.5

4.0

3.9

4.1

4.2

Normalised Operating Margin

3.4

3.0

3.7

3.6

3.7

3.8

BALANCE SHEET

Fixed Assets

 

 

31.5

66.5

47.1

41.9

34.4

12.8

Intangible Assets

10.1

4.0

2.3

1.7

(0.9)

(3.5)

Tangible Assets

10.9

9.4

9.4

8.6

9.8

11.0

Investments & other

10.5

53.1

35.4

31.6

25.5

5.3

Current Assets

 

 

181.2

165.9

139.1

147.5

145.2

141.9

Stocks

16.2

14.1

13.2

15.6

14.8

14.3

Debtors

124.2

101.2

106.6

95.7

95.1

92.2

Cash & cash equivalents

24.0

50.6

19.3

35.3

35.3

35.3

Other

16.8

0.0

0.0

0.9

0.0

0.0

Current Liabilities

 

 

(229.7)

(283.9)

(167.5)

(157.2)

(139.5)

(111.6)

Creditors

(173.7)

(139.5)

(136.5)

(140.3)

(134.2)

(109.7)

Tax and social security

0.0

(1.7)

(0.3)

0.0

0.0

0.0

Short term borrowings

(46.1)

(130.1)

(21.2)

(8.0)

3.6

(1.9)

Other

(9.9)

(12.6)

(9.5)

(8.9)

(8.9)

0.0

Long Term Liabilities

 

 

(57.3)

(30.1)

(76.4)

(64.2)

(58.2)

(48.8)

Long term borrowings

(49.3)

0.0

(50.1)

(39.1)

(39.1)

(39.1)

Other long term liabilities

(8.0)

(30.1)

(26.3)

(25.1)

(19.1)

(9.7)

Net Assets

 

 

(74.3)

(81.6)

(57.7)

(32.0)

(18.1)

(5.7)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

(74.3)

(81.6)

(57.7)

(32.0)

(18.1)

(5.7)

CASH FLOW

Op Cash Flow before WC and tax

60.1

40.4

44.9

42.9

43.2

42.9

Working capital

(3.9)

(5.3)

(1.8)

2.8

(4.7)

(21.2)

Exceptional & other

(7.7)

(13.4)

(1.3)

(4.4)

(2.2)

(2.2)

Tax

(2.6)

0.0

(6.3)

(5.3)

(6.8)

(7.8)

Other

(22.9)

1.7

5.9

13.8

6.9

6.9

Net operating cash flow

 

 

23.0

23.4

41.4

49.8

36.4

18.5

Capex

(8.1)

5.3

(2.4)

(1.9)

(4.2)

(4.2)

Acquisitions/disposals

0.0

(10.2)

6.5

14.0

0.0

0.0

Net interest

(5.1)

(8.0)

(9.4)

(8.0)

(4.0)

(3.3)

Equity financing

0.0

(0.7)

(2.6)

(2.6)

(0.8)

(0.8)

Dividends

0.1

(2.2)

(1.0)

(5.9)

(9.8)

(9.8)

Other

(2.8)

(15.6)

(5.9)

(6.4)

(6.0)

(6.0)

Net Cash Flow

7.1

(8.0)

26.6

39.0

11.6

(5.6)

Opening net debt/(cash)

 

 

79.3

72.1

79.7

53.2

14.2

2.6

FX

0.1

(0.1)

(0.2)

0.0

0.0

0.0

Other non-cash movements

0.0

0.5

0.1

0.0

0.0

0.0

Closing net debt/(cash)

 

 

72.1

79.7

53.2

14.2

2.6

8.1

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Smiths News and prepared and issued by Edison, in consideration of a fee payable by Smiths News. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Smiths News and prepared and issued by Edison, in consideration of a fee payable by Smiths News. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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