New business streams offer upside potential
Smiths’ new business streams appear to be going well and, in support of this progress,
the company has appointed an industry expert as its new MD of Smiths News Recycle,
which we believe is a solid endorsement of the business’s substantial potential. Several
trials of other new verticals are underway which, if successful, could more than offset
the anticipated declines in contribution from the news and magazine business, implying
growth. In addition, the balance sheet is now almost completely ungeared, offering
investors substantial dividend potential.
Expansion of new business streams with multiple trials
Smiths News Recycle is gaining momentum and, to this end, and as a solid endorsement
of the potential of the new business stream, Smiths has recruited a new MD of the
division to drive the business forward. This is a significant move because we understand
that the as-yet unnamed MD joins from a leading waste recycling company and believes
in the Smiths News story, as well as its potential to take share from existing traditional
waste handling companies.
In H1, Smiths grew the uptake of recycling from its existing news and magazine network
of clients by 5%, and the new MD will be tasked with the continued roll-out of recycling
to existing daily clients along its 900 routes, as well as the expansion to non-clients
for which a small scale trial has been initiated in Liverpool and Stoke. These non-news
and non-magazine clients are likely to be those shops and organisations that are located
adjacent to existing clients. These clients could include bakeries, betting shops
and fast-food outlets that produce material amounts of dry mix recyclate (DMR). At
many news and magazine delivery locations, there could be multiple opportunities to
offer DMR services at a lower cost than via existing service providers.
CIL Management Consultants believes the market could be worth c £230m, growing at
3–5% pa and offering a 10–15% EBITDA margin. Smiths generated an operating profit
of c £2.0m in FY24 from non-news and magazine services so if it took, say, a 10% share
of this non-news and magazine market, the profit stream could potentially be more
than doubled, ie £230m x a 10% market share (£23m), with a 10% margin implies a profit
of c £2.3m.
A second area of potential growth outside recycling is in the delivery of additional
categories such as books and home entertainment to other retail customers including
supermarkets and other grocers. Smiths has started a second trial with Hallmark, the
global greetings card expert, which included cards in pre-prepared stands and spinners.
Management says that early indications from the trial suggest it has started well,
and that success and progress will be reviewed in H225.
A third trial has also been progressed around the delivery of engineering and manufacturing
specialist parts to customers along routes. An example is the delivery of spare parts
for white goods to drop-off points for collection by engineers en route to domestic
customers. Smiths would not deliver to domestic locations as this is outside its remit,
potentially affecting core service quality.
H125 PBT rose by 11%
H125 results were robust, with revenue declining marginally to £536.4m (down 0.6%
vs H124) and underlying news and magazine revenue slipping by just 3.1%, offset by
the annualisation of previous contract wins (+1.6%), growth in collectables of 4.3%
and 25% growth in the non-core early morning supply chain initiatives.
Smiths News continues to focus on operational efficiencies and was able to generate
savings in the period of £3.0m (H124: £3.1m) which, along with the growth mentioned
above, led to an increase in adjusted operating profit of 3.2% to £19.4m. This implies
that the adjusted operating margin edged up to 3.6%.
Further down the income statement, finance charges fell from £2.9m to £1.7m as both
average net debt and debt margins were more favourable, which contributed to an 11%
increase in PBT and a 10% increase in EPS to 5.4p. The dividend was unchanged at 1.75p.
Free cash flow amounted to £13.3m (H124: £4.2m) and was particularly strong due to
higher operating profit (£1.2m), a smaller working capital outflow (£4.8m lower),
lower interest costs (£0.8m) and income of £2.3m from adjusting items, offset by some
small outflows. Average daily net debt in the period fell from £12.5m to £1.1m.
As mentioned above, Smiths made good progress on the non-core growth initiatives,
especially in Smiths News Recycle, where customer numbers increased by 5% from the
year-end (August). It is also making progress with trials on some other non-core growth
initiatives. Importantly, it has appointed a new MD for its recycling activities from
one of the largest players in waste recycling, endorsing the opportunity’s potential.
Management’s outlook is encouraging and revenue, adjusted operating profit and cash
generation are all in line with expectations. The growth initiatives are advancing
and the company hopes to provide a more comprehensive update with the FY25 results
in November.
