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Connect shares (LSE:CNCT) have fallen more than most. While it was falling I examined three factors, looking for reassurance that it will be able to ride out the storm:
- Will its banks support it if covenants are breached due to a slowdown in revenue and cash flow?
The measures put in place by the Bank of England and the Government encouraging banks to lend and to show forbearance led me to believe that even if Connect suffers in the downturn its banks will not call in its loans.
If banks were harsh the company can now turn to alternative sources (e.g. commercial paper sales direct to the BoE).
I could be wrong on the willingness of banks to treat established customers very leniently. But even if I am wrong the factors below mean that Connect probably will not breach its banking covenants in the first place.
- Will there be increased demand for Tuffnells’ delivery service?
For two years Tuffnells has produced losses due to the competitive nature of the industry and poor management. But a rising tide lifts all boats. The current rising tide is the massive increase in demand for home deliveries.
Amazon, Ocado, etc., can’t cope and are turning away customers for want of distribution capability. Tuffnells has an underused distribution network.
Clearly this is a business opportunity for Tuffnells to greatly increase turnover and raise prices.
Distribution is one of the Government mandated essential services along with nursing, supermarkets and utilities.
The jury is still out on whether the management of the depots has improved.
- Will newspapers still be bought?
In the UK 7m – 8m papers are sold daily plus 1.3m magazines. Connect’s Smiths News division visits 55% of the newsagents up and down the country early in the morning. I checked the lockdown exemptions in Italy, France and Germany before we introduced a tougher policy in the UK.
It turns out that newsagents are classed along with pharmacies and supermarkets as essential, thus they can stay open. People need news now more than ever. The cash-cow that is Smiths News continues.
Having done that research a fourth factor came as a very pleasant surprise, tipping me over the edge into buying the shares – the company issued a steady-as-she-goes trading update.
In these conditions an expectation of profit falls of around 10% in the year to end August strikes me as wonderful, especially after the shares had more than halved in a few days. There won’t be many companies that can say they still make over £18m after tax this year and be standing on market capitalisation of £37m (246m shares x £0.151).
More on the Trading Update
According to Wednesday’s update Connect has a “critical role in the UK’s news supply chain” and it is “an essential supply partner for many of our freight customers” which leads to “Core trading across the Group remain[ing] relatively robust despite the considerable disruption to the UK economy at present. Both Smiths News and Tuffnells are currently trading in line with expectations”.
Current expectations of the three analysts covering Connect are dividends of 1p in 2020 and 1.033p in 2021. That would give the shares a dividend yield at my average b………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
