Last year, the newspaper distribution and retailing businesses saw turnover grow 1.5 per cent and 3.5 per cent respectively: low growth rates which are not likely to improve in the foreseeable future. The pedestrian performance of the core activities meant that the group turnover rose just 2.1 per cent at pounds 1.25bn. A 10.8 per cent increase in the pre-tax profit to pounds 38.1m was therefore mainly due to operating efficiencies from continued restructuring.
Menzies is replacing its smaller newspaper wholesaling branches with a reduced total of large shed operations. The current 63 branches will eventually contract to between 35 and 40. Further moves depend on agreement for a carve-up of territories with its main rivals, WH Smith, being approved by the Office of Fair Trading.
But there is only so much extra efficiency and cost reduction to be squeezed from the existing business, hence the decision to move into new markets.
The diversification has already started with the acquisitions of 37 per cent of Funsoft, a German distributor of CD- ROM and other multimedia products. This market is far from mature and has enormous growth potential. A further diversification move has come with the joint venture with the Dutch Samas Groep to form Europe's third largest office stationary business. Management seems to have acknowledged that its existing universal Office Supplies business is not likely to become a big player. The current turnover of these two business is a combined pounds 320m.
In the long term there should be further growth from Menzies. However in the short term the share price is discounting most of that, having risen from 500p in the last three months to 581p, after yesterday's 8p rise.
Standing on a historic p/e of 13, the shares are probably high enough for now. Hold.