Securing Publisher Revenues Will Provide Stability Until 2029, But Declining News Industry Will Pose Future Risks

Key Takeaways

• Long-term revenue stability achieved by securing major publisher revenues until the end of the decade.
  
• Strategic growth initiatives in early morning services and recycling are expected to boost future earnings and profitability.
  
• Dependency on declining newspapers and magazines, along with tax hikes and cost pressures, threatens Smiths News' revenue stability and net margins.

Catalysts

Engages in the distributing of newspapers and magazines in the United Kingdom and internationally.

• Smiths News has secured over 90% of publisher revenues until at least 2029, providing long-term revenue stability and predictability, which is crucial for consistent revenue streams.
  
• The focus on expanding services in the early morning market and leveraging existing capabilities is showing initial success, with £2 million profit generated. This growth initiative is expected to positively impact future earnings as the company becomes the U.K.'s leading provider of early morning supply chain solutions.
  
• The new refinancing agreement removes restrictions on shareholder distributions, allowing increased dividends and a potential for further shareholder returns. This financial flexibility can enhance earnings per share (EPS) through capital allocation policies that support growth and dividends.
  
• Strategic investments in warehousing, reverse logistics, and technology upgrades over the next three years aim to future-proof the business and maintain competitive advantage, ultimately boosting efficiency and net margins.
  
• The recycling operations, as part of the growth strategy, have significant potential, with the recycling market estimated to offer a £230 million revenue opportunity. This initiative is expected to provide substantial revenue and profit growth, leveraging Smiths News’ existing logistics network.

Smiths News Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smiths News's revenue will decrease by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 2.5% in 3 years time.
• Analysts expect earnings to reach £24.0 million (and earnings per share of £0.1) by about April 2028, down from £25.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 5.0x today. This future PE is greater than the current PE for the GB Retail Distributors industry at 9.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Smiths News Future Earnings Per Share Growth

Risks

• The dependency on the news and magazine industry, which is undergoing a volume decline in newspapers and magazines, poses a risk to revenue stability, impacting long-term revenue prospects.
  
• While growth activities have increased, they still represent a relatively small part of overall sales, indicating a potential risk to achieving sufficient revenue diversification.
  
• The rise in the U.K. tax rate, which has lowered earnings per share (EPS), poses a threat to future net margins and overall earnings.
  
• The fluctuation in cash flow due to working capital cycle swings, which can exceed £40 million in a single month, may introduce variability in net margins and liquidity.
  
• Cost pressures from factors such as employer's contributions and national living wage adjustments could impact net margins if not adequately managed.

Valuation

• The analysts have a consensus price target of £0.85 for Smiths News based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.95, and the most bearish reporting a price target of just £0.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £947.5 million, earnings will come to £24.0 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of £0.53, the analyst price target of £0.85 is 37.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.