The UK’s leading newspaper and magazine distributer Smiths News (SNWS) has clear value credentials with the shares trading on a miserly 2026 PE (price to earnings) ratio of 5.2 times and a twice covered dividend yield of 10.7%.
Perceptions that the business is in terminal decline are misplaced and fail to take account of growth initiatives to exploit the firm’s unrivalled expertise in warehousing, reverse logistics and early morning last mile capabilities.
We believe investors are being handsomely paid to wait for the payoff from these initiatives by reinvesting the generous dividends.
Meanwhile the core business continues to throw-off increasing amounts of free cash flow, reducing average net debt in the first half to £1.1 million from £12.5 million in 2024.
The company has secured more than 91% of existing publisher contract revenues through to 2029, providing excellent medium-term visibility.
Smiths News has committed to investing £6 million annually over the next three years to optimise warehouse operations and efficiencies in a low-risk way while also supporting growth initiatives.
These include the roll-out of Smiths News Recycle, a waste recycling collection service tailored to retail customers. Headed up by a new hire from one of the largest players in the sector, the business generated a 5% increase in new customers in the first half of the year to 1 March.
The group plans to extend these services to new customers along selected existing delivery routes in the North West region.
Management believes the size of the market is around £230 million, growing at 3% to 5% a year, and capable of generating 10% to 15% EBITDA (earnings before interest, tax, depreciation, and amortisation) margins.
A second initiative is focused on the delivery of additional categories such as books and home entertainment to retail customers including supermarkets and grocers.
In February Smiths News started a trial with global greetings cards expert, Hallmark to deliver cards to independent retailers. The company estimates the total market opportunity from new verticals is worth £160 million.
The final growth initiative is based on leveraging the firm’s high-density network and unique position to offer final mile delivery.
The group has started a small-scale trial with several providers to deliver engineering and manufacturing specialist parts to customers along existing routes.
While still embryonic revenue from the growth initiatives was up 25% in the first half.
In summary, we believe the shares are priced as if this is a completely moribund business and give no credit for the company’s competitive advantages and emerging growth prospects.
Tangible progress from the new verticals, recycling services and final mile initiatives has been encouraging. It seems only a matter of time before the shares start to attract a more realistic rating.
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