Connect Group’s (LSE:CNCT) Smiths News produces profits and lots of cash flow year after year because it is a duopolist (alongside Menzies) delivering newspapers and magazines to shops. The duopolists tend to stick to their own territories when allocating their vans – it is pointless having two rivals vans passing each other in rural Norfolk for example, so either SN or M will take that contract.
A barrier deterring entry to the newspaper distribution business: A potential entrant would have to win five-year contracts from the major publishers on operating margins of around 3% and then organise a fleet of vans, with drivers and sorting depots. All the while, SN and M, with their efficiencies and experience, will be breathing down their necks and constantly undercutting on price.
Connect’s Dawson Media Direct, DMD, which supplies printed and digital media to airlines and travel points in the UK and worldwide, has recently suffered after losing contracts because some airlines switched to electronic newspapers.
In the year to the end of August DMD’s revenue and income, for the first time, are subsumed within Smiths News numbers. This is to be expected given that DMD is now quite small and engaged in media distribution.
Smiths News has a declining turnover because the volume of newspapers and magazines bought in the UK has fallen and is expected to continue to fall. Offsetting this are cover price rises, but nonetheless SN’s revenue has dropped by 3% - 5% per year – see table. This pattern has severely disturbed Mr Market – why buy into a business with falling sales?
The pattern of sales also bothered Connect’s leadership team over the past decade. It bothered them so much they thought it a good idea to go out and spend ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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