Smiths News reports a turnaround

Smiths News (SNWS) faces a major structural problem: its core business is in inexorable, though gentle, decline at a time when sales of newsprint are trending ever downwards. Newspapers rely on the company to distribute their products to all outlets, including the key independent market, that still sell them. And a misconceived diversification strategy has left the company with a lot of debt.

It is therefore pleasing to see that, on the evidence of these results, Smiths has come within an ace of a turnaround within the limits of its business model. The combined effect of strong cover prices, plus extra revenue related to the 2022 Fifa World Cup and the coronation was positive.

For instance, it looks likely that the balance sheet will return to positive shareholder funds by the end of next year – positive cash flow of £21.8mn helped to halve negative funds to £16.3mn in these results. The market will also be pleased that Smiths has now locked in 65 per cent of revenues until 2029 based on the contracts it has signed with publishers. It also managed to cut £5.8mn from operating costs.

The turnaround at Smiths means the current ratio of 0.98 is close to cash-positive, with net debt also falling rapidly. The business has always generated decent cash flows, mostly because of a duopoly hold over the distribution market. The shares have performed well, up 25 per cent over 12 months, but the forward consensus rating of 4.4 times earnings is more indicative of the market’s view of its prospects. Hold.

Last IC view: Hold, 43p, 13 May 2021