Good results and additional cash lead to another ‘special’ dividend
Smiths News reported better-than-expected FY25 results, largely due to a core business
that performed as expected, but with an additional and unexpected contribution from
collectables. In the event, revenue slipped 3.6% (-1.7% on a 52-week basis) to £1,064.0m
and adjusted operating profit was flat at £39.1m, versus our FY25 estimate of £37.0m,
which implied that the operating margin increased 20bp to 3.7%. Smiths generated operational
efficiencies of £4.9m, which contributed to the better-than-expected result.
Adjusted profit after tax increased £2.3m, or 9.3%, to £27.0m as finance costs fell
due to the lower finance fees in the period and lower overall debt. Adjusted EPS increased
7.8% to 11.1p, which led to a similar increase in the ordinary dividend to 5.55p,
in line with the two-times cover set out in the capital allocation policy.
Furthermore, cash generation was strong at £36.1m, which included the receipt of £6.9m
of additional cash (including £5.4m from the administrators of McColl’s Retail Group),
and resulted in year-end net cash of £3.3m (FY24: net debt of £11.0m). It also prompted
Smiths News to propose a second ‘special’ dividend of 3.0p/share (FY24: 2.0p/share),
which will cost a similar figure to the additional cash received.
| Exhibit 1: Smiths News full year and half year results summary |
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| Source: Company data and Edison Investment Research |
New verticals gaining traction
The new verticals being pursued by Smiths News continued to gain traction with a 16%
increase in revenue to £3.0m, although for a number of known reasons, including planned
investments and active trials, profits slipped from £2.0m to £1.4m. That said, we
believe this result is likely to signal a turning point as we expect the result for
FY26 will be no worse than the FY25 result. Thereafter, we expect the performance
to improve for a number of reasons listed below.
In recycling, Smiths’ volumes increased 49% to 2,550 tonnes. Smiths News was also
joined by Adam Wylie as MD (ex Veolia), who brings a wealth of knowledge and experience
to this growth initiative. This has already led to the use of partnerships with waste
brokers to make introductions rather than the previous, often time-consuming, direct
marketing approach. Early signs are encouraging. A recycling trial along existing
delivery routes in the Northwest concluded and offered valuable insights, which will
be applied to future initiatives. Added tailwinds here include new, already introduced
workplace recycling regulations, which require many businesses to separate waste into
different streams, and future regulation such as the Deposit Return Scheme, which
could generate significant bottle recycling volumes.
A second vertical focuses on the delivery of additional categories to existing customers.
This includes books and home entertainment (DVDs for example) to supermarkets and
high street retailers. In FY25, Smiths delivered 1.3m books to three supermarket customers
with the expectation that other names may follow. It also trialled the delivery of
greetings cards for the brand Hallmark, which proved successful, and is now live across
175 stores. In the year, this operation delivered over 63,000 cards and has the potential
to be rolled out to hundreds, or even thousands, of other outlets that Smiths News
already visits on a daily basis.
Smiths News is also offering a ‘final mile’ services solution, which targets new products
to new customers and locations. A small-scale trial of specialist engineering and
manufacturing parts was successful and since the period end, Smiths was awarded a
three-year, £1m per year contract to deliver volumes across the West Midlands. There
are several differing operating variants being considered for this vertical, with
the delivery, for example, of residential satellite TV and white goods spares being
potential areas of opportunity. This vertical is thought to have a total market size
of c £170m per year, implying that there is upside potential for Smiths if it can
demonstrate value to potential clients.
Revised expectations; profits up, plus additional ‘special’ dividend potential
The better-than-expected FY25 results and the promising outlook for trading for both
the core operations, plus collectables, and the new verticals has prompted us to raise
our FY26 and FY27 estimates. We now anticipate total adjusted operating profit of
£37.1m and £36.5m in FY26e and FY27e, up from £36.1m and £36.0m respectively. In addition,
we have introduced another ‘special’ dividend in FY27e of 2.0p/share, which, when
coupled with the ordinary dividend, gives rise to a total dividend of 7.3p. This follows
the payments of ‘special’ dividends in FY24 (2.0p) and FY25 (3.0p), and our previous
expectation of a 2.0p ‘special’ in the current year. We believe this is consistent
with the company’s existing capital allocation policy.
| Exhibit 2: Revised estimates |
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| Source: Company data and Edison Investment Research |
