Being in the right place at the right time is often perceived as pure luck. However, repeating the same trick three times in four years suggests there’s more to the story. Enter Smiths News, the wholesaler of newspapers and magazines.
The firm was spun out of WHSmith just in the nick of time, before the banking crisis commenced in 2007. Then it vacuumed up £500m of distribution contracts when rival Dawson Holdings went belly-up. Then it snapped up Bertram on the cheap for £15.6m after the collapse of Woolworths. Indeed, this book wholesaler, which serves shops, e-tailers and libraries, had three million books in stock at the time of the acquisition and now has a 45% share of the UK market.
Smiths News is now Britain’s leading newspaper and magazine distributor with a whopping 55% share – ahead of John Menzies, which controls pretty much the rest. Also, barriers to entry are substantial, due to some immense economies of scale and complex just-in-time delivery requirements.
For example, the group handles 80 million journals each week, serving 30,000 retail outlets – ranging from small outlets and convenience stores, through to supermarkets and garage forecourts for the likes of News International and The Daily Telegraph. It operates 24 hours a day, 364 days a year from 59 depots, and employs around 5,300 staff. And as most items are sold on a ‘sale or return’ basis, it also deals with the collection of about 15 million unsold items each week.
Smiths News (NWS):
But that’s not all. Because the print industry is in gradual decline (4% down in 2009) due to the popularity of other media (such as internet and TV), Smiths is aiming to cast its net wider. It is looking to take its logistics expertise into adjacent areas, including the distribution of food, medical supplies, household goods and automotive parts. Moreover, entering the rapidly expanding sector of online delivery on behalf of the likes of Amazon looks another no brainer – especially given that Royal Mail continues to suffer from crippling strikes and industrial action.
The City is forecasting turnover and underlying earnings per share of £1.8bn and 14.7p respectively for the 12 months ending August 2011. That puts the shares on an undemanding p/e ratio of less than seven, while also offering a tasty 7.5% yield. The balance sheet is in decent shape as well, with a net debt of £48m. An EBITDA multiple of 1.1 is well inside the group’s banking covenant target of 2.5.
All right, but what do we need to watch out for? Smiths’ biggest and most immediate challenge is to right-size its cost base. That’s needed to reflect the slow contraction in print media and the possible impact of the government’s spending cuts on Bertram’s library customers. That said, prospects further out are attractive, given the substantial opportunities elsewhere – and the dividend yield is a major plus as well.
Recommendation: SPECULATIVE BUY at 106p (market cap £195m)