London, UK, 19 October 2021

Smiths News (SNWS) Initiation - Predictable cash flows and growing dividends

Smiths News has successfully performed a turnaround of the business that has seen it return to a core newspaper and magazine distribution operation. While the print sector is declining, revenue is predictable and management has a clearly demonstrable cost-saving track record such that cash flow is strong and profits are broadly flat, post COVID-19. This means that debt is being paid down and dividends are likely to become an increasing feature. We value the business at 77p, twice the current price.

We value Smiths News at 77.4p/share based on a discounted cash flow (DCF) model, more than twice the current share price. Given the predictable and consistent cash flow of the core business, we believe this is a reasonable methodology to adopt. The value is confirmed by our dividend discount model (DDM) valuation, which suggests a value of 76.6p/share. A DDM approach is also an appropriate way to value the stock considering the current strategy, which is to generate cash, pay down debt and return surplus cash to shareholders via dividends and 'special' payments. In absolute terms, Smiths News trades on a P/E of 4.1x in 2022e, with a yield of 6.2% and the prospect of 'special' dividends to bolster the yield as debt falls. In our experience, when 'safe' dividend yields exceed P/Es in absolute terms, it highlights a value opportunity.  

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