This company has an enviable 55% share of its main marketplace and it is doing better than the analysts have been forecasting, writes Mark Watson-Mitchell.
It may sound like a transport company.
Or it could well be in the telecommunications sector.
It may have a declining revenue record for the last five years and the next two years as well.
It may have a mass of net debt over three times bigger than its £51m market capitalisation.
But I still think that its shares are looking too cheap and that they have at least a 30% uplift opportunity before the year is out.
What is more this company has an enviable 55% share of its main marketplace and it is doing better than the analysts have been forecasting.
Connect Group (LON:CNCT) is the UK’s largest newspaper and magazine distribution business.
Obviously, it was impacted by Covid-19 as it was necessary to close down some 10% of its customers’ stores during the crisis because they were ‘high volume’ outlets.
However, it has been able to put in place several useful cost reductions, which inevitably will feed down to the group’s bottom line.
Early last week (14 July) the group declared a Trading Update for the 44-week period to 4 July.
It showed resilient trading despite the virus hassles, with revenues off some 8.4% at its main Smiths News operation.
Yes, Connect Group trades as Smith News, which is the UK’s largest news wholesaler. It operates from 39 distribution centres and serves around 25,000 trade customers from Cornwall to Northumberland every day of the year. It delivers some 35m newspapers each week.
Not only does it handle the delivery of supplies, it also collects and recycles returns to the publishers. It also forecasts future demand and works closely with both its publishers and its retailers to meet the needs of millions of consumers across the UK.
One of the group’s subsidiary operations, DMD, which is a specialist supplier of printed and digital media to airlines and travel points in the UK and across the world, has been hit badly with the collapse in the travel sector. However, that is now sure to recover, albeit slowly.
The group’s third business is InStore, which works with retailers, suppliers and publishers in providing field-based merchandising and marketing, supply chain auditing and compliance solutions.
Sales at Smith News from 1 September to 4 July were down from £1.01bn to £927m. The cost reduction process had shown some £5m savings to that date, while another £4m per annum has been identified from an operating re-organisation.
With such a massive revenue line it is understandable that the group has a bank facility of £175m, of which £125m is a revolving credit line. Even with the Covid-19 impact the group has continued to operate well within its facilities. Confirmation of a refinancing could take place early next year.
Over the last five years sales have fallen gradually from £1.87bn in 2015 to £1.47bn for the year to end-August 2019. Estimates for this year suggest a further fall to below £1.3bn and then just £1.25bn next year.
The group surprised the market analysts when it stated in its update that adjusted pre-tax profits for this year could be between £26m to £28m. That was quite an uplift, which makes the earnings of some 8p per share look like giving money away, very easily covering a 1p per share dividend.
There are some 248m shares in issue, of which leading holders include Aberforth Partners (17.13%), Forum Family Office Services (14.10%), Fidelity International (9.91%), Silchester International Investors (9.30%), Jupiter Asset Management (8.98%), M&G Investment Management (4.27%), Hargreaves Lansdown Asset Management (3.64%), and Interactive Investor Services (2.33%).
The group’s shares have been as high as 39.7p in the last year and as low as 11p.
The end-August 2020 finals are due to be reported on Wednesday 4 November.
Currently trading at around the 20.25p level and yielding 5%, the shares are a risky counter but, I feel, they are extremely attractive taking a six-month view and looking for a 30% uplift with my target price of 27p.