Connect Group Pty Ltd.
When I first read about this assessment and getting our own companies, I was really excited. I was looking forward to having my own company and then analysing the financials and fundamentals of it. I was also looking forward to analysing the share price of the company, as I really do enjoy technical analysis, it’s a passion of mine. However, when I got assigned my company which is Connect Group Pty Ltd I was a little disappointed because I couldn’t access the charts due to it being listed in the UK and not on the ASX. Now while I was disappointed at first, it’s not a dealbreaker for me, as I’m still looking forward to analysing the financials of the company and learning a thing or two.
So here is more about my company Connect Group.
Connect group is the UK’s largest distributor of newspapers and magazines and mixed freight deliveries. And within Connect Group, are other businesses that make up Connect Group. I Like to think of it like how Wesfarmers is Bunnings, and Target and K-mart, Connect Group is made up of a range of businesses such as Smith News, DMD, Tuffnells, and Instore. Smith News and Tuffnells are by far their largest parts of the business.
Smith News is the UK largest news wholesaler, delivering to over 25000 clients with a distribution network of 39 locations. They deliver 28 million newspapers and 8.2 million magazines weekly. That is Huge.
DMD specialises in printed and digital media and supplying airports, airlines, rail operators with magazines and newspapers. In May 2019, DMD lost its biggest client British airways, and as a result of this, had to materially scale back the operating costs.
Instore provides field marketing, supply chain auditing and compliance services to retailers, suppliers and publishers.
Tuffnells is a leading specialist in mixed and irregular freight that has over 36 depots delivering to 167 countries. One thing I really liked about this company is that they are embracing technological changes and also implemented Tuffnells portal for their clients with an online tracking service.
Connect group has six values to which guides their business. They are quick, creative, open, trusted, fair, friendly. You can find the values here
They also some have some good CSR policies as well. Look at their stance on Anti-Slavery, which you can find here.
They have recently hired a new CEO as well.
But I wonder how sustainable this group is. Smith’s news makes up a vast majority of its business, and therefore generates most of its revenue. But will there be much growth for this company in the future? Personally, I wouldn’t think so. These days you can simply pay $10 a month through apple news and get all the news related articles you could want. Without having to wait for deliveries, and at a simple click of a button. Add to that increasing online competition, News companies are now offering their own subscriptions for their loyal client base, completely removing the supplier. So, if I were to look at the financials, I wonder, how much this company’s revenue has been on the decline over the past few years? 15 years ago, I used to work for a company selling computer games. Back then digital downloading of games wasn’t a big thing, neither was online gaming, certainly not the level it is at by todays standards. I watched it grow, and now, digital downloading is very much driving a competitive threat to the retailers in the video game industry. So how will connect group deal with its increasing digital competition?
As I start to look into the financials, I can see the potential impact of everything going digital has had. Particularly from an investor point of view. Total group revenue Year on Year has been on a steady decline since 2015. That’s 4 full years of declining revenue. Add to that the earnings per share (2017 EPS 15.5p to 2019 EPS 7.9p) is also on a decline and has been since 2015. Dividends per share has also been on decline since 2017. In 2016 they paid 9.5p Dividend per share, and in 2017 they paid 9.8p dividend per share. Now in 2019 they have paid just 1p DPS.
I’ve seen this in companies before. When I look at companies to invest in, the ones that struggle at times, are the ones that fail to expand, acquire and continue investing more into themselves rather than pay out the majority of its profits to its shareholders. As an example look at CSL on the ASX as an example of how to properly manage and allocate funds, focusing reinvesting profits rather than placing more focus on dividends. It’s now the largest market cap stock on the ASX. It would almost seem that connect group has been too heavily focused on dividends.
Now having said all of that, this is probably a transformative time for Connect group. They have been around for over 200 years, there’s not many companies that I can think of that have been around for that long. In Smith News they continue to implement cost saving techniques which is offsetting the weaker demand, and although revenue was lower Year on year, their adjusted operating profit was up by 12.1%. This is very positive. Tuffnells continued to have a challenging year with a negative operating profit of 14.1 million (2018 was a negative 5 million), and now connect group are in the process of implementing a strategic review. Perhaps a closure of the company is on the cards?
My point of view is that connect group’s challenges are going to be to continue bringing costs down, and running Tufnell’s at a profit or terminating that side of the business.
Tuffnells appears to have either really satisfied customers or extremely unsatisfied. Looking at Trustpilot out of 3000 reviews, they scored an average rating of 1.8 stars out of 5 stars. 39% rated them as excellent while 47% rated them as bad, and gave them the lowest score. This can lead to an impact on growth and profitability. Tuffnells are currently implementing new customer service strategies, sales and operational KPI’s targeting customer offerings and experiences, along with it’s trading performance is also monitored in real time as well.
You can find a video here https://www.youtube.com/watch?v=f2eBy9NF0CM where it goes into a little bit more detail around tuffnells and some of the issues it faces.
Smith news is currently running at an operating margin of 3.3%. and connect group net debt finished for the year at 73.9 million, down from 83.4 million.
My conclusion is that if Tuffnells can’t improve their customer service model, and satisfy their customer expectations, improve upon their operating costs, the business will continue to run at a loss and be part of an overall structure redesign. Smith News needs to focus on how it can continue bringing costs down, while also embracing the digital age and thinking about how to increase revenue and not just control costs.
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