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Acquisitions give boost to Smiths News
Traded on: Main Market Ticker: NWS Contact: 0845 123 0000 or visit smithnews.co.uk
Ever since William Caxton introduced the printing press to Britain more than 500 years ago, we have enjoyed reading documents printed on paper.
The arrival of the internet was widely expected to change that trend but, intriguingly, the facts suggest otherwise.
Every year, sales of books, magazines and newspapers amount to about £8bn in this country and the figure has held reasonably steady for the past five years.
The recession has affected magazine sales marginally but more than 3,500 titles are still produced regularly, ranging from bestsellers such as OK! to specialist interest publications such as Tractor.
The resilience of the printed word is of particular interest to Smiths News, which acts as the middle-man between publishers and consumers for newspapers, magazines and books.
Originally part of WHSmith, it has been an independent company for the past four years, during which time it has become steadily more attractive, both as a business and an investment.
The group is responsible for delivering newspapers and magazines to supermarkets, newsagents and other retailers, often in the middle of the night. And it supplies bookshops and online operators, such as Amazon, with books as and when they need them.
Over the past year there has been a major change in the company’s activities.
There used to be three main distributors of newspapers and magazines – Smiths, John Menzies and Dawson News.
But Dawson collapsed into administration last year and its operations were bought by Smiths and Menzies. The deal left Smiths with more staff, more depots and £500m of extra annual revenue.
Smiths also bought book wholesaler Bertrams last year. It had been acquired by Woolworths for £41m in 2007, but it was left in no-man’s-land after Woolworths went into administration in 2008.
Smiths chief executive Mark Cashmore rescued the firm and bagged a bargain, paying about £15m for a business with 3m books in stock. But Cashmore has not been driving growth by acquisition alone, he has also been investing to create a business that offers better service and is more efficient.
The group has state-of-the-art technology to improve processes at its depots and cut costs in simple but logical ways, such as tracking lorries to make sure they take the shortest or fastest routes from depots to retailers.
Many of the company’s contracts are for five years, so it has about £8bn of secure revenue until 2015.
Margins are slim in the sector, but Smiths is still expected to deliver steady growth, with profits forecast to rise 13% to £36.8m in the year to this August and another 13% to £41.8m in the year to August 2011.
The firm also generates plenty of cash, so it is generous with dividends. Last year, it paid 6.7p. This year the forecast is 7.3p, rising to 7.8p in 2011.
Cashmore hopes to derive more cost cuts from the Dawson integration and is keen to boost revenues by moving into related areas, such as regional newspaper distribution.
>> Midas verdict: Smiths News shares are 108p, so the stock is yielding more than 6%. As Cashmore continues to develop the business, the price should tick up. In the meantime, the dividend offers investors a handsome income. Buy.
MIDAS UPDATE
Sit tight as Avanti share price rockets
Traded on: Aim Ticker: AVN Contact: 020 7749 1600 or avantiplc.com
Avanti Communications could not be more different from Smiths News. Whereas Smiths is solid, dependable and centred on print, Avanti is adventurous, high-tech and centred on the internet.
The company delivers satellite broadband services, which give people speedy access to the internet, even if they live in remote or rural areas.
Midas recommended Avanti in May 2009 when the shares were 184p. At the time, the company was renting space from other satellite operators but was busy preparing its own, Hylas 1, for launch.
It is due to be shot into space in September and Avanti has started building Hylas 2, which will launch in 2012.
Hylas 1 is focused on delivering a high-speed internet service to homes in the UK, Ireland and parts of the Continent.
Hylas 2 is much bigger, covering the whole of Europe, as well as Africa and the Middle East. The two satellites should have the capacity to help 1.3m homes but demand across these regions is estimated at nearer 100m homes so the potential for growth is substantial.
Avanti, under chief executive David Williams, moved into profit last year, making £1.8m in the 12 months to June. This year should see further growth but, once the two satellites are launched, profits should really begin to motor.
>> Midas verdict: Avanti shares have more than doubled to 4391⁄2p in the past 13 months. Brokers believe the stock is worth at least 650p, but the price is constrained because there is always a risk that the launch of Hylas 1 will be unsuccessful.
Investors who bought last year could hedge their bets by selling 25 to 30%. New investors may want to dip a toe in the water – if both satellites do what they are supposed to, there is still real potential in the shares.
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