Connect Group - the core business

Connect’s (LSE:CNCT) managerial team came with the demerger of Smiths News distribution business from the WH Smiths group 12 years ago. Their expertise, honed over decades, is in efficiently gathering newspapers and magazines each day at its depots, and then sending out thousands of vans to deliver to newsagents up and down the country early in the morning.

They have familiarity with the task, they have systems, and they are well recognised by the publishers.

The contracts Connect Group signs with the publishers are usually for delivery in a region for five years, thus they have good visibility on revenue and profits from this operation. Operating profit margins are small (2-3%), but at least a profit is built into the contracts, and the volume is very large at over £1,300m pa.

There is no point in publishers paying for two competing fleets of vans to turn up at village newsagents, so Connect has a number of local monopolies.  The industry as a whole is a duopoly, with John Menzies winning contracts to service certain regions (it has a slightly smaller operation than Connect).

Figures for News distribution business

Connect managers are in the habit of excluding certain expenses as exceptional.  So, to be conservative, we ought to look only at the statutory operating profit.  In that case, we say that this division has made over £29m after tax for shareholders in a typical year.

Admittedly, the revenue numbers are on a downward trend by about 4% per year.  But the profit numbers have been stabilised by the managers finding around £5m of cost savings each year.  But this happy trend will be interrupted this year, so we’d better not count on £5m savings in the future.

Also note the stability in John Menzies’ profit numbers.  The two companies do very nicely from their cosy, gentlemanly duopoly.

Is paper doomed?

Mr Market focuses on the 4% or so decline in the sale of paper newspapers and magazines, as people switch to reading articles online. The level of pessimism out there, as reflected in the falling share price, suggests that Mr Market anticipates a pretty rapid fall in sales and profits to zero within say ten years.

I’m not so sure.  I felt the same level of pessimism about textbook sales seven years ago when I was asked to write the fifth edition of Corporate Financial Management.  At first I refused to undertake the task, thinking that students will switch to pirated electronic copies and I would not get paid for 1,000 hours of work.

But this has not come to pass. It turns out that students like to read a paper version and pirating has been countered.  Paper is a very good technology, le

……………To read the rest of this article, and more like it, 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).

Related Articles:

WHAT IS ADVFN?

ADVFN covers all things stock market.

From the news and opinion pieces on pages like this to share discussion forums, charting tools, financials, live share prices and Level 2, order book data

If you trade or invest ADVFN has the tools you need to make the right decisions.

• 

  101 Ways to Pick Stock Market Winners

  You need the number one bestselling investment guide, the definitive text for day traders, investors and stock pickers.

• 

  The Death of Wealth

  Dissecting the global economy and the financial markets, the book lays out the evidence for the next economic game changer: the Death of Wealth.

• 

  IQ Option

• 

  Deb Shaw

• 

  Lou Gutheil

• 

  Matthew Davison