Smiths News: FY27 broker forecasts cut ~25% on expansion costs — but does opportunity remain?

Down 9.6% to 73p (£187m) - Preliminary Results

Today's results from the UK's largest newspaper wholesaler starts well, with FY26 figures that are in line with consensus forecasts. The sting in the tail is that management expects a hit to profits during the current year as Smiths makes the investment needed to expand its distribution network nationally to service a number of recent contract wins.

I've put this down as a profit warning as there are material cuts to broker earnings forecasts this morning. However, I do think we need to recognise the context here: near-term profits are going to disappoint because the company is investing to support contract wins, not because of any trading shortfall.

We've been positive in the past on Smiths News, most recently in September when the company upgraded its FY26 guidance (y/e 29 Aug 26) to reflect a strong performance from collectables (e.g. FIFA World Cup stickers).

Let's take a look at today's results to see if our positive view can be maintained.

FY26 results summary

Today's headline numbers are as we've come to expect from this business - a small decline in revenue with flattish (adjusted) profits:

• Revenue down 2.6% to £1,036.2m

• Adjusted operating profit down 1% to £38.7m

• Adjusted earnings per share up 1.8% to 11.3p

• Dividend up 0.1p to 5.65p per share

• Free cash flow: £24m

• Net cash: £3.9m (FY25: £3.3m)

If this was the end of the story, then I'd suggest a neutral view was fair here based on the combination of an attractive, sustainable dividend yield but no growth.

However, that isn't the whole story. Smiths News has secured a number of large contracts over the summer. Management says these wins represent c.£375m of additional annual revenue and will support an expanded national distribution network. That opens the door to the potential that this business could return to growth over the next few years, potentially justifying a higher valuation.

The company has helpfully provided a summary of its revised contract situation today, highlighting both additional volume and duration:

Go National expansion plan: these contract wins will see Smiths News become the UK's largest newspaper and magazine distributor, with a 61% share of these combined markets at the point when contracts commence. Alongside this, the company is pursuing growth opportunities in areas such as cardboard and paper recycling collection (for return loads).

To service this extended workload the company needs to expand its network to offer national coverage. This will involve adding 700 additional routes and 23 new depots; a substantial investment.

As promised, management has provided financial guidance for this expansion with today's results:

• Total implementation costs of £21m to £27m

• Additional "early life transition costs" of between £7m and £9m in FY27 relating to onboarding new clients.

• New contracts are expected to deliver incremental net profit of £0m to £2m in FY28 and between £12m and £18m from FY29.

It's clear that if the new contracts can deliver the hoped-for net profit (i.e. profit after tax) from FY29, then the implementation costs outlined today should provide attractive returns on investment.

A short-term hit to earnings in FY27 could be a reasonable price to pay to achieve this growth potential.

Although there's obviously scope for mishaps and cost overruns when carrying out such a significant expansion, I think it's reassuring that the new work remains within the company's core competency. By adding new routes and depots, Smiths isn't doing anything it hasn't done many times before. That should reduce the likelihood of problems.

The other potential risk is the ongoing decline in print volumes that will continue in the background. The company has won a much larger slice of a shrinking pie. Consolidation is the correct solution to this problem, but the exact pace of future decline is hard to predict.

Updated broker estimates

Consensus forecasts for FY27 fell slightly in September, when the company outlined its plans and upgraded FY26 guidance:

However, today's cut is much more material. Broker Canaccord Genuity has helpfully published an updated note on Research Tree today, including revised EPS estimates:

• FY27E adj EPS: 7.3p (-27.7% vs 10.1p previously)

• FY28E adj EPS: 9.4p (-6.9% vs 10.1p previously)

• FY29E adj EPS: 12.1p (new forecasts)

A 28% cut to FY27E earnings is a big reduction - adjusted EPS has been hovering around 10p for a number of years now.

However, the opportunity appears to be significant, so the short-term pain may be worthwhile.

Roland's view

In my view, this year's contract wins and the associated expansion plan have increased both the risk and the opportunity for shareholders.

Arguably, the risk is mitigated by the company's continued focus on its core business and its solid execution in recent years. But I can't ignore the reality that earnings in both FY27 and FY28 are now likely to be lower than previously expected.

Today's downgrade leaves Smiths trading on a FY27E P/E of 10, falling to a P/E of around six in FY29.

The company expects to maintain the current dividend through the next year, providing a potential dividend yield of 7.6% after this morning's drop.

There could be attractive value here, but there's also increased execution risk and potentially a longer timeframe before this value will be realised.

To reflect this situation, I'm moving our view down by one notch to AMBER/GREEN today.