Income: Underrated distribution potential

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This fully listed distribution business has limited growth potential, but it is highly cash generative. The company could have net cash as early as 2025. The prospective yield is 7.8% and estimated dividend cover is around 2.4 times.

There is little likelihood of any significant increase in the dividend over the coming years, but that cash generation means that the dividend can be maintained without any financial concerns. Pre-tax profit is likely to be flat to slightly lower over the next three years. That is why the prospective multiple is not much more than five, although that seems too low.

Swindon-based newspaper and magazines distributor Smiths News (LON: SNWS) has been winning and renewing major contracts in recent weeks. This provides visibility of two-thirds of expected revenues, even before any additional renewals.

The main new win is a £27m/year contract with News UK covering the London area. This will contribute for nine months this year.

Magazine revenues are declining and that means that core revenues will fall. There are ways that additional income can be generated. One initiative is offering to collect recycling waste from customers, thereby more efficiently using vehicles. There are already 4,000 paying customers. This could add £1m to profit this year, offsetting any decline in the core business.

There is excess space that can be rented and potential for direct to consumer business. There is also potential to add new product areas.  

Smiths News can still move into a net cash position during 2025 as long-term borrowings are reduced. The lower interest charge helps to offset any decline in operating profit due to inflationary pressures. There are plans for more cost savings.

In the year to August 2024, pre-tax profit is likely to be flat at £33.4m on revenues declining from £1.09bn to £1.03bn. The total dividend has been 4.15p/share for the past two years and that is set to continue, although there could be a small increase when the £10m restriction placed on payouts by lenders ends.  

At 53.8p, the share price has risen by 15% this year. In the first nine months of the year the share price was lower, but there has been a rise of around one-third in the latest quarter. Even so, there is potential for income and growth in the share price. Buy.

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