Paperlinx - Waiting for the turnaround

"Our results for the year reflect the significant impact of negative movements in key external factors".  


Words to this effect were just as applicable to Paperlinx in 2009 and 2010, as they were when the comments were originally made in reference to the 2006 results.  In that particular year, Paperlinx saw its NPAT drop to $65m from $90m the year prior.  In the annual report, board and management commented on global factors beyond their control and the imminent restructuring they would undertake to enable the company to better weather future storms.  However, fast forward a few years later, and global factors again played their part as Paperlinx lost nearly $800m in 2009 and then backed it up with a $225m loss in 2010.  


From its 2006 high of $4.40, PPX was yesterday (2 Nov 10) trading at 44c.  Now may be the time for Paperlinx to turn things around.  They've divested the paper manufacturing business, reduced debt by $1.2b since December 2008 (for perspective, current market cap is $265m) and look in much better shape to take advantage of any rebound in paper demand.  


Comments from the Chairman at the recent AGM - "Our September 2010 quarter results are at the levels we expected and our operating earnings and earnings after tax are both meaningfully ahead of the depressed results for the corresponding period last year.” (emphasis added)  These comments can be corroborated with Q3 results from US paper companies and associated overseas commentary that both pricing and volumes have improved in North America and Europe. 


Post the commentary above, the market appears to be slow in reacting to any potential turnaround. Currency risk is a factor - Paperlinx derives most of its revenues from overseas c.70% Europe, 20% US and 10% Aus/NZ.  


Further investigation into the industry structure is also warranted to get a sense of Paperlinx's position in the paper value chain. It may be that integrated manufacturers/merchants will erode Paperlinx's distributor role over time.  Although for paper manufacturers without a merchant arm, Paperlinx (and other distributors) will be their route to market, suggesting that a tenable long-term position exists.  These are longer-term considerations; in the short term, the immediate analysis suggests that a positive half yearly report may be on the cards, at which point the Australian market may take more notice than it has done to date about a prospective turnaround in the paper industry and PPX's operating performance. 


PPX currently trades at a price-to-book ratio of 0.5, and a price-to-sales ratio of 0.05 (12m trailing).  Looking forward (and referring to historic merchanting performance), a return to more "normal" demand may suggest a normalised earnings range of between $30-50m pa.  Applying a conservative PE multiple of 10x, suggests a valuation in the range of $300-500m.  At yesterday's market cap of $265m, my analysis suggests that PPX may be relatively undervalued. 


Taking note of a few names on the register, Maple-Brown Abbott is the top shareholder with over 12%, who seemingly haven't done much with the holding since 2006 when they held a similar percentage.  Orbis Investment Management (12%) are also on the list and seem to have a habit of cropping up on substantial shareholder notices when securities appear to be trading at low valuations. 


Disclosure: PPX (Long)


About Paperlinx (from finance.google.com)
Paperlinx (ASX:PPX) "is engaged in distributing paper, sign and display, graphics solutions and industrial packaging. Its customers are located in Australia, New Zealand, Asia, Europe and North America. It is a global merchant of paper and communication materials. The Company merchants and distributes products across 26 countries of around three million tons of paper per annually. Its European network of merchants across 17 countries provides over two million tons of paper products to its 80,000 customers. The customer base consists of printers, publishers, sign makers and advertisers. It also serves resellers, retailers, offices and businesses with paper and packaging material. During the fiscal year ended June 2010 (fiscal 2010, it closed the Tasmanian mills and sold its Australian manufacturing business, Australian Paper, to Nippon Paper Group, which included the Wesley Vale Mill and Burnie Mill in Tasmania."