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John Menzies hit by distribution woe

John Menzies is chugging along nicely in aviation services, but weakness in its news distribution arm is casting a shadow over the group
December 4, 2013

What’s new

■ News distribution struggling

■ Brokers cut full year earnings forecasts

■ Aviation still trading well

IC TIP: Hold at 790p

A trading update from John Menzies (MNZS) this month showed that weakness in the news distribution arm still had the potential to spoil a good story in aviation services. The group’s strategy has been one of managing the structural decline in newspaper and magazine distribution through tight cost controls, whilst going for growth in aviation services such as cargo handling.

The aviation business has made a good start to the second half with ground handling volumes continuing to show growth and the recent acquisitions of Desacol and Skystar bedding down well. Contract win momentum has remained positive with the award of a five-year contract with Cathay Pacific, which Menzies says underpins future revenues.

But all this good news was overshadowed by an admission that trading in the news distribution arm has been weaker than expected. Magazine and newspaper sales have shown an unchanged trend since the half-year results in August, but there was unexpected softness in ancillary revenues, sticker collections and weaker than forecast seasonal sales within the marketing services business.

Given this, the group said it now expects full year results to be a shade lower than previously expected. The shares fell 6 per cent as the market digested the revised outlook.

 

Liberum Capital says…

Buy. Although aviation has remained in-line, disappointing trading at distribution has continued. We cut our distribution operating earnings forecasts by 10 per cent which drives a 5 per cent reduction in group EPS in both 2013 and 2014. We now forecast 64.2p for 2013. After a strong run we expect the shares to fall given the level of the downgrade in the statement. We continue to like the structural growth dynamics in aviation but are concerned by the growing differential between Smiths News newspaper & magazines business (which is holding operating earnings flat) and Menzies Distribution which has seen 23 per cent operating earnings downgrades over the past 12 months. Nevertheless, a 2014 PE ratio of 12 times, and an enterprise value to operating earnings ratio of 10 times, are not demanding multiples.

 

Peel Hunt says…

Buy. Primarily due to further disappointment at distribution we have reduced our 2013 pre-tax profit estimate by 6 per cent from £56m (EPS of 69.7p) to £52.5m (EPS of 65.3p). We are aware that investors may want greater comfort over the ability of distribution to maintain current profitability levels, but medium-term prospects for aviation remain attractive. Moreover, placing aviation on the same 8.2 time cash profits rating paid for peer Swissport in February 2011 (which equates to a 25 per cent discount to rival BBA’s 2014 cash profit multiple), implies 5.4 times for distribution - that's a 25 per cent discount to Smith News; reflecting the recent financial underperformance of the business.