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Three-quarters of Connect’s (LSE:CNCT) turnover and profits still comes from the business that was demerged from WH Smith into Smiths News in 2006 – that of distributing newspapers and magazines to thousands of shops daily.
According to its rival, John Menzies, “the print media sector is estimated to be worth around £2.6bn pa, split roughly two-thirds news and one-third magazines” (John Menzies Annual Report 2016).
Of that total, John Menzies has a turnover of £1.1bn in its distribution division (7m papers per day, 25,000 retail drops), whereas Connect has £1.4bn – see table.
You can see the duopolistic nature of this industry at the aggregate level. At a more local level it is often monopolistic because it simply doesn’t make sense for John Menzies’ vans to criss-cross an area followed by Connect’s vans – better for each to dominate their own clusters.
(Market capitalisation of Connect is £256m).
Figures for News distribution business
| £m |
2 x Interims 2017 |
2016 | 2015 | 2014 | 2013 |
2012 |
| Connect News Revenue |
1,385 |
1,444 | 1,479 | 1,525 | 1,529 |
1,571 |
| Connect News
Adjusted operating profit |
39.8 |
40.0 | 41.4 | 42.9 | 40.0 |
39 |
| Connect News Depreciation and amortisation |
6.8 |
6.8 | 6.0 | 5.4 | 5.6 |
5.7 |
| Connect News Additions to non-current assets |
7.2 |
5.2 | 8.0 | 7.7 | 6.7 |
6.7 |
| John Menzies Revenue from distribution |
1,138 |
1,171 | 1,184 | 1,203 |
1,224 |
|
| John Menzies operating profit from distribution |
25 |
25 | 24 | 24 |
28 |
The downward trend in revenue for both companies is caused by a smaller volume of newspapers and magazines being bought year on year.
But this has been countered to some degree by (a) a rise in cover prices, and (b) lowered costs of operating the business. Thus the Connects profits have been stabilised at around £40m on the director’s adjusted numbers.
We need to allow for about £5m – £10m of suspect negative items shoved into “exceptional items” each year, by-passing the adjusted operating profit numbers so that the Connect directors can prettify the annual report. Thus, to be strict, the adjusted profit numbers should be downgraded by £5m – £10m, to be viewed as around £30m -£35m each year.
The stability in revenue (even if on a gentle downward slope) and in profits suggests a gentlemanly sort of competition when bidding for the five-year contracts from the publishers.
They take a small margin of a large revenue. Also, as we saw in the last newsletter the credit supplied by the publishers means that Connect does not need to provide any capital to this business. Indeed it is so cash rich that this can assist other divisions within the Group.
Competitive position
The market place for Connect is characterised by a fragmented supply chain (i.e. many newspaper and magazine publishers) and thousands of different products, which presents a complex management task.
On the customer side, i.e. the thousands of small shops, we see great diversity and great geographic dispersion. Again this requires talent in managing complexity.
Only Connect and John Menzies have the scale and scope to offer publishers a complete service. Only Connect and Menzies have invested in the technology and distribution infrastructure to be able to mesh effectively with the supplier’s systems, and to offer an efficient and timely service to retailers. These are important competitive advantages.
“We operate some of the largest and most sophistic……………………………….
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