Colorpak's result leaves investors blue

Packing company Colorpak (CKL) is asking investors to be patient as management is promising an earnings rebound in 2014-15 after delivering a disappointing first half result today.

Packaging company Colorpak (CKL) crashed to a five-month low on a disappointing first-half result today, which its chief executive described as a “blip”.

Shareholders were not so sanguine and sold the stock down 11.8% – its worst one-day sell-off since October 2008 when the stock suffered a similar drop.

Operating leverage cuts both ways, with weaker demand for its services and a loss of a major customer contract shaving 11% off group revenue to $82.6 million while underlying net profit tumbled 44% to $2.7 million for the six months to end December.

Analysts will be busy downgrading their forecasts for the stock tomorrow as the result stands in contrast to consensus estimates, which were tipping sales of $93.4 million and an adjusted net profit of $4.4 million.

“Of course I am disappointed but [the result] is not unexpected given the big factors at play here,” Colorpak’s chief executive Alex Commins told Eureka Report.

“There are early signs of a recovery. It’s too early to tell [how the second half will pan out], but our January volumes were quite good.”

Commins is asking shareholders to be patient as 2014-15 is the watershed moment for the company as it is expected to return to growth.

By that time, one-off factors impacting on its half-year result would have washed through. This includes the higher-than-expected costs of integrating the company’s Mount Waverley operations into its Braeside facility and the loss of a big contract, which contributed to nearly half the drop in revenue.

However, pressure on Colorpak’s customers from supermarket giants favouring imported private-label products is a longer-term issue management has to face, although Commins says the category is not a significant contributor to group revenue.

What is also worrying is that rivals have managed to steal some business away from Colorpak even though Commins believes that rational behaviour is returning to the market now that Amcor (AMC) has demerged its Australasian business, Orora (ORA).

The silver lining for Colorpak’s shareholders is the dividend. The fall in profit will not threaten its distribution and the stock is trading on a fully-franked yield of around 6.7%.

The stock’s valuation should also give it some support. Going by Colorpak’s 2013-14 full year guidance, the stock is trading on a price-earnings multiple of around 11 times and around 8 times for the following year.

Further, I believe Colorpak is well run and well positioned over the medium term. It’s just taking longer than anticipated to reach my earnings estimates, and I am reviewing my recommendation on the stock for Wednesday's Uncapped article.

Colorpak is part of the Uncapped 100

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