A value idea you'll probably hate.

You may not have heard of this stock or recognize the name as it is one of those Companies that has changed its name to try and reinvent itself and its image. The stock is now called Connect which sounds like an exciting tech or electronic stock but is in fact what used to be Smiths News the newspaper and magazine wholesaler / distributor. As you can see from the chart below it has had something of a roller coaster ride in recent times.

So what's the story here and why do I think it is a good value idea? Well firstly they are in the process of diversifying their business by using the cash flow from the news side to buy into and develop other divisions such as books and educational supplies. They aim to have less than 50% of their business in the news side within a couple of years. They have also managed to secure over 50% of the news business with contracts out to 2019 providing some visibility in what is otherwise a declining business. 

The balance sheet is geared and a bit weird as they have a big negative £280.1 million balance in other assets which according to the report and accounts: "relates to reserves created following the capital reorganisation undertaken as part of the demerger of WH Smith PLC in 2006.The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital."  Otherwise the net debt is not too high at between 1 to 1.5x EBITDA versus a 2.5x covenant, interest cover is 13.9x versus a 3x covenant and fixed charge coverage was 5.3x versus 2x covenant. Finally their Pension deficit seems to be around £56.9 million (Source: Annual Report).

The shares also stand on a relatively low rating of 7.4x P/E with a 2x covered 6.5% yield probably reflecting investors scepticism about the sustainability of the business in the long term. However this is despite the fact that they have managed to move earnings and dividends ahead modestly in the last few years. Looking at the chart above it looks like the shares are finding support around the 150 pence level having sold off aggressively since the start of the year on no great change to the outlook. With final results due next month including a chunky final dividend a return to the 180 pence level to close the gap on the chart might afford a decent trading profit if you did not want to hold it for the long run.

I am also encouraged by their disclosures about major shareholder list which includes some good value houses such Aberforth Partners and Silchester Investments. You can get a copy of their report and accounts and other information about the group at their investor relations site and they also provide a useful corporate overview which you can connect to by clicking the image below if you don't hate this idea too much.

Click to download Connect Corporate Overview.