Dawson (DWN)

Conditions in Dawson’s core newspaper and magazine distribution market are still poor, but seem at least to have stabilised. Indeed, the performance of this division, which accounts for 91 per cent of revenue and 69 per cent of operating profit, is even improving thanks to cost-cutting, jettisoning unprofitable work and a small acquisition. As a result, its profits are now on a positive trend. Following four consecutive half-year periods of falling profits, operating profit had slid to a low of just £2.5m in the final half of 2005-06. Since then, they have picked up to £3.9m in the first-half of 2006-07, followed by £4.5m in the second half.

And plans are in place to drive through further improvements in profit margins over the next three years. These include replacing the distribution division’s IT system, rolling out new packaging technology, centralising some tasks, and applying 'best practice' across the group. True, implementing such measures always carries risks, but Dawson's rival, Smith News, has produced impressive results from similar measures.

The group’s three small-growth businesses are also now making a useful contribution to operating profits. What’s more, following some noteworthy investment in the financial year just ended, growth prospects look encouraging.

Prospects look best for Dawson Media Direct, which distributes newspapers, magazines and digital entertainment to airline passengers. There are high hopes for a new Dubai-based joint venture that moves the business into the Middle East. Meanwhile, the group’s academic books distribution business also looks in good shape after heavy IT investment last year and the introduction of a web-based distribution platform. Finally, the group’s marketing and internet-shopping fulfilment business should benefit from the acquisition of Marketlink Marketing Communications in late August, which triples its turnover.

However, the main attraction of Dawson's shares is the dividend. While last year’s dividend cover of 1.1 times was precarious, the support the payout got from cashflow was more encouraging. Indeed, after paying out £4.9m on dividends and spending £9m on acquisitions, the group’s year-end net debt only rose by only £1.8m. Due to big cash movements in the distribution business, average net debt is really a better measure of the group’s financial position and this measure, adjusted to take account of the acquisitions, rose from £13.7m to £21.3m during the year. But even that is less than the spending on acquisitions.

A danger to the dividend could come from a serious downturn in consumer spending, but the business in general looks pretty defensive. Spending on newspapers and magazines is not too sensitive to economic ructions. Meanwhile, the expansion of the airlines business overseas should help offset any travails at home. And the fulfilment business should benefit from rising online shopping even if conditions on the high street are bleak. What’s more, the academic books business is insulated from consumer concerns. So, with prospects looking better than they have for some time, we recommend buying Dawson shares to lock in the hearty yield as interest rates start to fall back. Buy.

BULL POINTS

High dividend yield

Recovery in newspaper and magazine distribution

Robust financial position

Growth prospects for smaller businesses

BEAR POINTS

Risks associated with implementing restructuring plans

Core news market challenging but stable