Dick Smith bust bites PMP
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The fall of retailer Dick Smith has captured enormous attention. This is no upstart; Dick Smith has been in business since 1968 and survived through enormous changes to the retail and electronics industry. Just six months ago, it reported 2015 profits of $38m and was optimistic about the future.
Its sudden demise has invited scrutiny over management and onetime private equity owners but, with the business now in administration, creditors are more interested in capturing their debts rather than apportioning blame. Among those creditors is PMP, which prints and distributes Dick Smith's catalogues.
PMP announced that its maximum exposure to Dick Smith is $4m but didn't outline the likelihood of repayment. As a trade creditor, PMP is reasonably high on the priority list but, unfortunately, Dick Smith is low on cash and high on debts. So to be conservative we must assume that none of that money will be recovered.
PMP currently has net debt of just $10m and is generating free cash flow of about $30m a year. Not collecting on Dick Smith's debt is a blow but it doesn't change our view of the business or the valuation. As we outlined in PMP: pressing on (Speculative Buy — $0.52), the business remains an attractive SPECULATIVE BUY.
Note: The Intelligent Investor Equity Income Portfolio owns shares in PMP. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.
Disclosure: The author owns shares in PMP
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