Ed Bowsher looks at a tempting value play.
The Motley Fool has traditionally been pretty sceptical about the value of analyst research. But when I see a broker's note highlighting a cash generative company paying out an 8% yield, I sit up and pay attention.
The high-yielding company is Dawson Holdings
(LSE: DWN)
, one of the big three newspaper distributors in the UK. Its rivals are Smiths News
(LSE: NWS)
and John Menzies
(LSE: MNZS)
.
The analyst note was published by broker Corporate Synergy, and the broker doesn't just highlight Dawson's chunky yield (covered 1.2 times.) At 92p, the company is trading on a multiple of ten times forecast earnings for this year, while net debt of £13.8m is relatively modest when compared to a market cap of £60m.
Corporate Synergy also cited an adjusted free cash flow figure of £8.5m for 2005. That means Dawson has a free cash flow yield of 14%. Great stuff!
Of course, there are downsides. Newspaper sales in the UK appear to be in structural decline and readers are switching from monthly magazines to weekly titles. Clearly the greater volume from weekly titles is good, but weeklies tend to be cheaper than monthlies which means that Dawson's revenue per magazine is lower.
Dawson also faces pressure from the likes of Tesco
(LSE: TSCO)
and Sainsbury
(LSE: SBRY)
who want to squeeze their suppliers.
What's more, The Office of Fair Trading (OFT) is investigating newspaper and magazine distribution in the UK. Corporate Synergy, however, thinks this inquiry probably won't inflict serious damage on Dawson. In fact, the losers would probably be the small independent distributors; Dawson might even be able to benefit from the little guys' troubles.
A large fixed cost base is another concern. If a newsagent orders 3% fewer magazines, Dawson still has to pay the same van driver to deliver the smaller order, so a 3% fall in sales is likely to trigger a larger slide in profits. That means you can't rule out further downgrades in analyst forecasts.
So yes, Dawson has its problems and there's a risk that it could be a "value trap." In other words, it looks cheap at first glance, but further calamities might cause the share price to fall even further.
But Dawson has its plus points too. The new chief executive, Peter Harris, is hoping that efficiency gains will increase Dawson's margins to the levels enjoyed by Smiths and John Menzies. Possible takeovers of smaller independents could deliver economies of scale.
I also think that Dawson has some defensive qualities. Newspaper sales may be being damaged by the rise of the internet, but I doubt that a recession would hasten that decline. When times are tough, you may well cancel an expensive holiday in Thailand, but the latest edition of Heat or GQ is a cheap treat that could ease your pain a little. Put simply, plenty of people will still be buying papers and magazines in 2016.
I also firmly believe that everything has its price. And for me, 92p looks too cheap for a high-yielding company with a reasonable, but not fantastic, competitive position.
