Smiths News — Expansion initiatives begin to blossom

Smiths News (LSE: SNWS)

Last close As at 21/05/2024

GBP0.65

1.60 (2.54%)

Market capitalisation

GBP160m

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Research: Industrials

Smiths News — Expansion initiatives begin to blossom

The FY23 results highlight continued growth in adjusted operating profit, management’s tight control of the business and the ongoing annual efficiencies being delivered. Smiths may also renew several long-term publisher contracts this year, which could imply visibility over at least 80% of annual revenues to 2029. Furthermore, development of new profit streams is beginning to create momentum, which may have the potential to more than offset the slow decline in core profits and support the dividend. Our valuation remains unchanged at 89p, representing c 90% upside.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Smiths News

Expansion initiatives begin to blossom

FY23 results

General industrials

20 November 2023

Price

47p

Market cap

£116m

Net debt (£m) at 31 August 2023

4.2

Shares in issue (includes 10.4m held by ESOP)

247.7m

Free float

87.7%

Code

SNWS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.0

2.9

13.2

Rel (local)

11.3

0.5

11.7

52-week high/low

57.6p

40.0p

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

May 2024

Analysts

Andy Murphy

+44 (0)20 3077 5700

Natalya Davies

+44 (0)20 3077 5700

Smiths News is a research client of Edison Investment Research Limited

The FY23 results highlight continued growth in adjusted operating profit, management’s tight control of the business and the ongoing annual efficiencies being delivered. Smiths may also renew several long-term publisher contracts this year, which could imply visibility over at least 80% of annual revenues to 2029. Furthermore, development of new profit streams is beginning to create momentum, which may have the potential to more than offset the slow decline in core profits and support the dividend. Our valuation remains unchanged at 89p, representing c 90% upside.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/22

1,089.3

32.3

11.7

4.2

4.0

8.8

08/23

1,091.9

33.4

11.3

4.2

4.2

8.8

08/24e

1,026.4

33.4

10.8

4.2

4.4

8.8

08/25e

995.6

33.3

10.7

4.2

4.4

8.8

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

Revenue, profit and margin all grow

FY23 revenue grew modestly to £1,091.9m bucking the pre-COVID trend of a 3–5% pa decline. Smiths News was also hit by inflationary cost increases but, due to the ongoing cost savings activity that reduced expenses by £5.8m, total adjusted operating profit rose by 1.8% to £38.8m, implying that the margin edged up from 3.5% to 3.6%. Smith News remains a highly cash-generative operation, producing free cash flow in the year of £21.8m, which contributed to the reduction in average net debt of 50% to £25.0m. The company anticipates paying a total dividend of 4.15p/share, which is flat year-on-year and in line with the maximum £10m pa payout allowed under its current financing arrangements.

Contract wins and new initiatives have potential

In October, Smiths News announced that it had won an exclusive c £27m pa News UK distribution contract in London to serve ‘direct to retail’ customers. It also won a new c £4.5m contract with National World to distribute the Midland News Association titles in the Midlands from December 2023. In addition, Smiths News is making significant progress expanding adjacent services. The most advanced is Smiths News Recycle, a waste recycling service. The service was launched in February and has already attracted 4,000 paying customers. Smiths News anticipates that this new initiative could add c £1m to operating profit in FY24. Given the potential, this could grow to a point where it more than offsets the secular decline in the core business and results in flat, or potentially rising, group profits.

Valuation: Yield of c 9% as interest rates peak

Our underlying estimates are unchanged and we therefore also retain our DCF valuation of Smiths News at 89p/share, representing c 90% upside to the current share price. The company trades on a P/E multiple of 4.4x in both FY24 and FY25, which we believe is attractive for a company with such cash-generative characteristics. It yields nearly 9% from a dividend that is more than twice covered.

Good results and progress with expansion initiatives

FY23 results detailed modest growth in profitability despite structural challenges and inflationary pressure, which highlights the benefits of management action to cut costs and develop new income streams as well as one-off income from one-shots in the period. Our largely unchanged forecasts currently show a minor decline in operating profit, but if Smiths News can continue to develop alternative income streams from recycling and other initiatives, then we believe there may be some upside to forecasts, which would underpin not only cash flow, but also the longevity and magnitude of the dividend.

Revenue and profits up highlighting management action

FY23 revenue grew modestly to £1,091.9m, bucking the pre-COVID trend of a 3–5% pa decline. Within the year, H1 grew by 1% and H2 declined by 0.5%, largely reflecting the timing of one-shot related events such as the FIFA World Cup, the release of Pokémon trading cards and the events related to the royal succession. In the year, newspapers increased revenue by 0.6%, benefiting from a number of cover price increases, magazine revenue fell by 5.1%, in line with the historical range, and collectibles, which account for c 4% of revenue, rose by 43% y-o-y for the second year in a row.

Gross profit was marginally down year-on-year to £72.5m. Smiths News was also hit by inflationary cost increases but, due to the ongoing cost savings activity that reduced expenses by £5.8m, total adjusted operating profit rose by 1.8% to £38.8m, implying that the margin edged up from 3.5% to 3.6%.

Smiths News remains a highly cash-generative operation, producing free cash flow in the year of £21.8m (down 54.8% due to one-off receipts of £22.1m in the prior year), which contributed to the reduction in average net debt of 50% to £25.0m. FY23 bank net debt reported was £4.2m. The net debt to EBITDA (ex IFRS 16) ratio has fallen from 0.3x to 0.1x. The company anticipates paying a total dividend of 4.15p/share, which is flat year-on-year and in line with the maximum £10m pa payout allowed under its current financing arrangements.

Exhibit 1: Summary of reported full-year results

(£m)

FY21

H1

H2

FY22

H1

H2

FY23

Total revenue

1,109.6

544.8

544.5

1,089.3

550.1

541.8

1,091.9

% change

-4.7%

-1.2%

-2.4%

-1.8%

1.0%

-0.5%

0.2%

Cost of goods sold

(1,036.2)

(508.0)

(508.6)

(1,016.6)

(512.4)

(507.0)

(1,019.4)

% change

-5.1%

-1.5%

-2.2%

-1.9%

0.9%

-0.3%

0.3%

Gross profit

73.4

36.8

35.9

72.7

37.7

34.8

72.5

Gross margin

6.6%

6.8%

6.6%

6.7%

6.9%

6.4%

6.6%

Total admin expenses

(33.9)

(17.9)

(17.1)

(35.0)

(17.4)

(16.4)

(33.8)

% change

-11.0%

5.9%

0.6%

3.2%

-2.8%

-4.1%

-3.4%

Income from JV

0.1

0.2

0.1

0.3

0.1

0.0

0.1

Total adjusted operating profit

39.6

19.1

19.0

38.1

20.4

18.4

38.8

% change

12.8%

1.1%

-8.2%

-3.8%

6.8%

-3.2%

1.8%

Total adjusted operating profit margin

3.6%

3.5%

3.5%

3.5%

3.7%

3.4%

3.6%

Source: Smiths News reports, Edison Investment Research

Due to a combination of ongoing cost saving and efficiency measures, inflationary pressures and new business opportunities, operating profit has been broadly flat for the last three years, though it did edge up in FY23 as discussed above. We currently anticipate a very modest decline in FY24 and FY25, as shown in Exhibit 2 below, but we believe there is upside risks to our forecasts as Smiths News takes on the new News UK contract discussed below, and continues to develop its rapidly growing new business opportunities. It is also targeting another c £5m of cost savings in the current year.

Exhibit 2: Total adjusted operating profit and operating margin, FY21–25e

Source: Smiths News reports, Edison Investment Research

New business opportunities show traction

In October, Smiths News announced that it had won an exclusive News UK distribution contract in London to serve ‘direct to retail’ customers, which had previously been carried out in-house by News UK. This new contract has a sales value of c £27m pa and will see Smiths delivering News UK titles to 2,500 existing London-based retailers every day. The contract commenced on 13 November and will therefore make a contribution of around nine months in the current year and a full 12-month contribution in FY25. It also won a new contract with National World to distribute the Midland News Association titles in the Midlands from December 2023. This contract is work an additional c £4.5m pa.

In addition, Smiths News is making significant progress expanding its capabilities, which includes:

Logistics – renting out of excess space and sortation services,

Direct to consumer – a JV investment with Love Media and continued investigation and experimentation,

Supply chain – home news delivery (rental of warehouse space only) and direct to retail and regional press, and

Categories and data – DVDs and books, expanding categories and customers.

The most advanced service expansion initiative is Smiths News Recycle, where the company is offering a service to collect waste recycling from existing retailers and adjacent business. The initiative is potentially very efficient as Smiths’ own vehicles will be removing the waste that another vehicle would usually be collecting, thus giving Smiths a revenue generating backload, saving costs for the customer and potentially reducing the overall carbon footprint.

The service was launched in February and has already attracted 4,000 paying customers. Smiths News delivers to c 12,000 retailers and these businesses are located in retail centres, so the number of potential clients could be a multiple of this figure and could include betting shops and other retailers. Smiths News anticipates that this new initiative could add c £1m to operating profit in FY24. Given the potential, this could grow to a point where it more than offsets the secular decline in the core business and results in flat, or potentially rising, group profits.

Contract renewals could imply c 80% revenue visibility

In addition to the News UK contract extension mentioned above and the new National World contract, Smiths News renewed distribution contracts with a number of existing large customers in the year, including Frontline, Seymour Distribution, Associated Newspapers Telegraph Media Group and News UK. Collectively, these deals give Smiths News visibility on revenue and cash flow on at least 65% of revenue until 2029, see Exhibit 3 below. However, there are other contracts up for renewal in the near future (eg a new contract with Marketforce was announced on 17 November) that could see the visibility to 2029 rise to at least 80%, thus increasing the quality of Smiths News income, supporting its shareholders returns.

Exhibit 3: Contracted revenues in FY22/23 and FY23/24e

Source: Smiths News, Edison Investment Research

Forecasts and 89p/share valuation unchanged

Given that we have largely retained our existing forecasts, we also retain our 89p/share DCF-based valuation, which implies c 90% upside in the shares. We also introduce FY26 figures, see Exhibit 4.


Exhibit 4: Financial summary

£'m

2019

2020

2021

2022

2023

2024e

2025e

2026e

Year end 31 August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,303.5

1,164.5

1,109.6

1,089.3

1,091.9

1,026.4

995.6

965.7

Cost of Sales

(1,217.5)

(1,091.4)

(1,036.2)

(1,016.6)

(1,019.4)

(956.9)

(927.4)

(899.5)

Gross Profit

86.0

73.1

73.4

72.7

72.5

69.4

68.2

66.2

EBITDA

 

 

60.1

40.4

44.9

42.9

42.7

42.1

41.8

40.6

Normalised operating profit

 

 

44.0

35.4

40.6

39.3

39.9

38.9

38.6

37.4

Share-based payments

(0.4)

(0.3)

(1.0)

(1.2)

(1.1)

(1.1)

(1.1)

(1.1)

Total adjusted operating profit

43.6

35.1

39.6

38.1

38.8

37.8

37.5

36.3

Amortisation of acquired intangibles

(0.1)

(0.2)

0.0

(4.4)

0.0

0.0

0.0

0.0

Exceptionals

(7.2)

(7.8)

(1.9)

(2.5)

0.1

(1.0)

(1.0)

(1.0)

Impairment

0.0

(6.0)

(1.6)

1.2

0.0

0.0

0.0

0.0

Other financial costs

0.0

0.9

3.5

2.5

0.0

0.0

0.0

0.0

Other

0.0

0.0

(0.3)

0.0

(0.6)

0.0

0.0

0.0

Reported operating profit

36.3

22.0

39.3

34.9

38.3

36.8

36.5

35.3

Net Interest

(6.0)

(7.2)

(8.7)

(7.0)

(6.5)

(5.5)

(5.3)

(4.6)

Profit Before Tax (norm)

 

 

38.0

28.2

31.9

32.3

33.4

33.4

33.3

32.8

Profit Before Tax (reported)

 

 

30.3

14.8

30.6

27.9

31.8

31.3

31.2

30.7

Reported tax

(8.4)

(2.8)

(4.3)

(4.5)

(6.7)

(7.8)

(7.8)

(7.7)

Profit After Tax (norm)

29.6

25.4

27.6

27.8

26.7

25.6

25.5

25.1

Profit After Tax (reported)

21.9

12.0

26.3

23.4

25.1

23.5

23.4

23.0

Discontinued operations

(53.4)

(18.7)

(0.1)

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

29.6

25.4

27.6

27.8

26.7

25.6

25.5

25.1

Net income (reported)

(31.5)

(6.7)

26.2

23.4

25.1

23.5

23.4

23.0

Basic average number of shares outstanding (m)

246

245

244

239

237

237

237

237

EPS - basic normalised (p)

 

 

12.01

10.39

11.33

11.66

11.25

10.77

10.73

10.58

EPS - diluted normalised (p)

 

 

11.98

10.28

10.83

11.03

10.68

10.28

10.24

10.10

EPS - basic reported (p)

 

 

(12.78)

(2.74)

10.76

9.81

10.58

9.88

9.85

9.70

Dividend (p)

1.00

0.00

1.50

4.15

4.15

4.15

4.15

4.15

Revenue growth (%)

N/A

(-10.7)

(-4.7)

(-1.8)

0.2

(-6.0)

0.0

0.0

Gross Margin (%)

6.6

6.3

6.6

6.7

6.6

6.8

6.9

6.9

EBITDA Margin (%)

4.6

3.5

4.0

3.9

3.9

4.1

4.2

4.2

Normalised Operating Margin

3.4

3.0

3.7

3.6

3.7

3.8

3.9

3.9

BALANCE SHEET

Fixed Assets

 

 

31.5

66.5

47.1

41.9

38.6

30.7

23.3

15.9

Intangible Assets

10.1

4.0

2.3

1.7

1.9

1.7

1.5

1.3

Tangible Assets

10.9

9.4

9.4

8.6

8.8

7.5

6.7

5.9

Investments & other

10.5

53.1

35.4

31.6

27.9

21.5

15.1

8.7

Current Assets

 

 

181.2

165.9

139.1

147.5

156.7

144.1

140.9

138.3

Stocks

16.2

14.1

13.2

15.6

17.7

13.9

13.4

13.5

Debtors

124.2

101.2

106.6

95.7

101.1

92.4

89.6

86.9

Cash & cash equivalents

24.0

50.6

19.3

35.3

37.3

37.3

37.3

37.3

Other

16.8

0.0

0.0

0.9

0.6

0.6

0.6

0.6

Current Liabilities

 

 

(229.7)

(283.9)

(167.5)

(157.2)

(158.9)

(127.2)

(120.9)

(117.8)

Creditors

(173.7)

(139.5)

(136.5)

(140.3)

(141.5)

(109.8)

(103.5)

(100.4)

Tax and social security

0.0

(1.7)

(0.3)

0.0

0.0

0.0

0.0

0.0

Short term borrowings

(46.1)

(130.1)

(21.2)

(8.0)

(10.0)

(10.0)

(10.0)

(10.0)

Other

(9.9)

(12.6)

(9.5)

(8.9)

(7.4)

(7.4)

(7.4)

(7.4)

Long Term Liabilities

 

 

(57.3)

(30.1)

(76.4)

(64.2)

(52.7)

(50.6)

(31.6)

(10.3)

Long term borrowings

(49.3)

0.0

(50.1)

(39.1)

(30.2)

(34.1)

(20.1)

(3.8)

Other long term liabilities

(8.0)

(30.1)

(26.3)

(25.1)

(22.5)

(16.5)

(11.5)

(6.5)

Shareholders' equity

 

 

(74.3)

(81.6)

(57.7)

(32.0)

(16.3)

(3.0)

11.7

26.1

CASH FLOW

Op Cash Flow before WC and tax

60.1

40.4

44.9

42.9

42.7

42.1

41.8

40.6

Working capital

(3.9)

(5.3)

(1.8)

2.8

(5.5)

(19.1)

(3.1)

(0.5)

Exceptional & other

(7.7)

(13.4)

(1.3)

(4.4)

(1.6)

(2.1)

(2.1)

(2.1)

Tax

(2.6)

0.0

(6.3)

(5.3)

(6.6)

(7.8)

(7.8)

(7.7)

Other

(22.9)

1.7

5.9

13.8

7.4

7.1

7.1

7.1

Net operating cash flow

 

 

23.0

23.4

41.4

49.8

36.4

20.1

35.9

37.4

Capex

(8.1)

5.3

(2.4)

(1.9)

(3.4)

(4.2)

(3.2)

(3.2)

Acquisitions/disposals

0.0

(10.2)

6.5

14.0

(0.3)

0.0

0.0

0.0

Net interest

(5.1)

(8.0)

(9.4)

(8.0)

(5.3)

(3.3)

(3.1)

(2.4)

Equity financing

0.0

(0.7)

(2.6)

(2.6)

(1.7)

(0.8)

(0.8)

(0.8)

Dividends

0.1

(2.2)

(1.0)

(5.9)

(9.6)

(9.7)

(9.7)

(9.7)

Other

(2.8)

(15.6)

(5.9)

(6.4)

(6.1)

(6.0)

(5.0)

(5.0)

Net Cash Flow

7.1

(8.0)

26.6

39.0

10.0

(3.9)

14.0

16.3

Opening net debt/(cash)

 

 

79.3

72.1

79.7

53.2

14.2

4.2

8.1

(5.9)

FX

0.1

(0.1)

(0.2)

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.5

0.1

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

72.1

79.7

53.2

14.2

4.2

8.1

(5.9)

(22.2)

Source: Smiths News accounts, Edison Investment Research. Shares in issue excludes 10.4m shares held by ESOP.

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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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Research: Metals & Mining

Wheaton Precious Metals — Putting net cash to work

On 15 November, Wheaton Precious Metals acquired three streams from Ivanhoe’s Platreef project in South Africa, BMC Minerals’ Kudz Ze Kayah project in the Yukon and Dalradian’s Curraghinalt project in Northern Ireland. In summary, the streams allow for varying purchases of precious metals by Wheaton at varying prices and we calculate that the trio will add an initial c 26.3koz of gold equivalent ounces (GEOs) to WPM’s production profile from FY25, rising to c 35.4koz GEOs when all three are in production from FY27 (Edison assumption).

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