Five years ago PMP carried net debt of almost $150m and the business was struggling. PMP’s transformation from a debt-ridden disaster to profitable, stable printer of catalogues is now largely complete and is perfectly illustrated by its balance sheet today.
Mountainous debt has been repaid and the business now carries a small net cash position, the first time it has been debt free in living memory.
The improved balance sheet doesn’t only reduce risk; it also highlights the sheer volume of cash being generated even as statutory profits appear feeble. That was again the case in PMP's full-year result where the business reported net profit of just $185,000.
Poor profit result
FCF remains strong
Now debt free
That low number includes more than $14m in significant items, including restructuring charges of $8m, impairments related to the collapse of Dick Smith worth $4m and a $1.5m break fee for repaying debt too quickly.
On an underlying basis, net profit was more respectable at $12m although this was 2% lower than last year due a contract loss.
Competition remains intense and print volumes were lower across the board, including falls of 11% in catalogue volumes and a 10% in magazine volumes. New distribution contracts and lower costs helped offset the decline but this was still a poor result.
Case on track
The core of our investment case – that PMP is depreciating far more than it is spending in capital expenditure and hence under-reporting earnings – was again evident.
|Year to June||2016||2015|| /(–)
|U'lying EBITDA ($m)||51.2||58.1||(7)|
|U'lying EBIT ($m)||23.3||26.4||(12)|
|U'lying NPAT ($m)||11.8||12.1||(2)|
|Post-tax sig. items ($m)||11.6||4.1||–|
|Op. cash flow ($m)||32||33.2||(1)|
Depreciation and amortisation came to $28m but the business spent just $4m on capital expenditure. Maintenance on the existing asset base was expensed so underlying net profit of $12m was far below cash flow.
As we explained in PMP: Pressing on last November, PMP is depreciating an asset base that will not be replaced so we expect profits to remain undercooked for some time. Cash flow is the best way to value the business and, on this score, operating cash flow fell marginally to $32m while free cash flow was stable at $28m.
Even after rising 26% this year, PMP still trades on a free cash flow yield of 14% and well below net tangible asset backing of 73 cents per share.
Management did reveal that they were looking for an acquisition opportunity which is important for our investment case. Buying a competitor would lower industry capacity, lift utilisation rates and generate higher margins but, so far, peers have been reluctant to sell.
Free cash flows have also been used to buy back $4m of stock over the year and the business paid almost $12m in dividends. At current prices the full year dividend of 3 cents represents a sustainable yield of 4.7%.
Due to liquidity concerns, the buyback has been cancelled and dividends could climb again but are tied to net profits. PMP has pledged to pay 100% of underlying net profits in dividends, which still leaves ample cash to build an acquisition war chest.
PMP hasn’t had a great year with losses from Dick Smith and an additional contract loss detracting from profits but, with cash flow still strong and a mismatch between accounting and economic depreciation expected to continue, the investment case is on track.
Our base valuation is about 70 cents per share but acquisitions could lift it considerably over $1 if done well. While catalogues are an attractive part of the print business, the industry itself remains competitive and tough.
This is still an average business albeit one operating well and performing nicely. We don’t wish to chase the stock price. With the share price now above our buy price, we’re downgrading to HOLD.
Disclosure: The author owns shares in PMP.