Connect Group – a history of earnings

PUBLISHED: 24 Mar 2020 @ 23:51 | Comments (0) |

Connect Group (LSE:CNCT) has one business generating an operating profit north of £34m. For a £37m market capitalisation company that is a substantial amount. And this operating profit, from the Smith News newspaper and magazine distribution business, has been consistently high (2014: £40.8m, 2015: £23.2m, 2016: £34.1m, 2017: £36.1m, 2018: £25m, 2019: £36.3m, expectation for year to August 2020: £34m).

Smiths News has a 55% market share, and local monopolies all over the country. Its only opposition is Menzies News, which tends to stick to its own newsagent territories. Entry into this line of business is very hard given the strengths of the two incumbents. Over 80% of publishers have already signed up to contracts with Smiths News for another five years.

If this business was the only one owned by Connect Group then, obviously, it’s a good share to buy. Mr Market, on the other hand, thinks, because fewer physical newspapers and magazines are being bought year by year, that SN will suffer greatly, and this has helped push down the share price.

I do not see good reasons for such pessimism in the numbers coming out of the company. Even though volumes of papers/magazines sold have gone down by 5-10% per year for a long time now, the managers have largely offset this by finding efficiencies, and cover prices have risen.

The main reasons, however, for Connect’s shares to be trading on a cyclically adjusted price earnings ratio of only 2.1 is not to do with Smiths News but derive from two large risk factors.

The first is that the Tuffnells parcel delivery business, bought for £121m in 2014, might continue to lose money hand over fist for years to come.

The second is that the Group’s high debt levels will become unsustainable should the cash flow of the Group decline substantially. Bankers – in normal times – may not be understanding if the EBITDA-based ratios used for loan covenants are breached. The nightmare scenario becomes possible if directors do not get a grip of the………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

CLICK HERE TO REGISTER FOR FREE ON ADVFN, the world's leading stocks and shares information website, provides the private investor with all the latest high-tech trading tools and includes live price data streaming, stock quotes and the option to access 'Level 2' data on all of the world's key exchanges (LSE, NYSE, NASDAQ, Euronext etc).

This area of the ADVFN.com site is for independent financial commentary. These blogs are provided by independent authors via a common carrier platform and do not represent the opinions of ADVFN Plc. ADVFN Plc does not monitor, approve, endorse or exert editorial control over these articles and does not therefore accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at ADVFN.com is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by ADVFN.COM and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Authors may or may not have positions in stocks that they are discussing but it should be considered very likely that their opinions are aligned with their trading and that they hold positions in companies, forex, commodities and other instruments they discuss.