Updated July 11, 2012
Twitter: @PaperlinXsuX
Updated June 28, 2012 Twitter: @PaperlinXsuX
Goldman Sachs - Company Update PPX June 26, 2012
JP Morgan - Company Update PPX June 26, 2012
Updated 5 March 2012 Twitter: @PaperlinXsuX
PIGS Bulletin #3 - 1 Mar 2012 by Brad Newcombe
Goldman Sachs - 28 Feb 2012
Macquarie Private Wealth - 27 Feb 2012
Updated 27 Dec 2011 Twitter: @PaperlinXsuX
First advice we’ve seen about PaperlinX
post Dec 23, 2011.
MORNINGSTAR Equities has given the
thumbs up to two of the takeover deals announced last week, but says to stay
well clear of Paperlinx. See
The broker believes it has enough
information to recommend staying well clear of paper producer Paperlinx
however.
It is itself going to stop covering the
stock next month and said shareholders should not expect much of a premium from
any takeover.
Ed Comment: This broker is typically thinking like a sharebroker and
conveniently forgetting about the rights of hybrid debt holders.
"The whole of company takeover proposal values Paperlinx at around
$111 million," it said.
"While it offers little in the way of a premium to market prices
this is not surprising given the outlook and the need to address the capital
structure.
"Conditions have continued to deteriorate since the AGM,
particularly in key European markets. Paperlinx now expects to report a first
half underlying loss of $23 million and a statutory net loss of $26 million.
"We see little prospect of any major turnaround in the second half
and have downgraded our full year numbers from an underlying net loss of $4.7
million to a loss of $31 million.
"Paperlinx confirmed it is in compliance with its banking
covenants, but with an impairment charge expected against the European
operations there is some uncertainty as to whether it will continue to comply.
Yet another reason to avoid this stock and not expect any significant premium
in the event of a takeover."
Pre Dec 23, 2011
Because PaperlinX has fallen out of the ASX 200 there is little independent research currently available.
Here is fundamental analysis by Thomson Reuters.
"PPX is an unattractive investment in an unattractive industry". Detailed review (go to page 9) by independent InvestorFirst Limited dated 18 April, 2011.
We've also found independent research at Takingstock.com.au - PaperlinX
It
also includes some thoughtful questions and answers, including the ‘Orbis
option’. Danny Sandler is the founder and portfolio manager at Ocean Asset Management, as well as the
principal writer at Taking Stock.
Ed: Highlighted text by me, otherwise presented here as published
PaperlinX – another sorry tale of woe
Posted on September 1, 2011 by Danny Sandler | 9 comments
It's tough being a paper wholesaler in a world where paper usage is in both cyclical decline and, in all likelihood, structural decline.
PaperlinX (PPX) has
found it difficult to make any money over the last 3 years, and this is before
abnormals have been taken into account. Sales volumes have been in what seems like a
perpetual decline, whilst at the same time pricing has been weak. This is a recipe for disaster
for a business whose EBIT margins at the best of times were less than 3%, and
whose balance sheet carries a big chunk of debt.
To be
fair, the business has undergone a major transition over the last few
years, shedding its manufacturing operation and looking to focus
solely on its merchanting business. But
as we stated above, this has not stopped the losses.
This
is not to say that PPX is not a big business. The company still generated
revenue of $5.66 billion in 2011; however this was significantly down on
its peak of $7 billion. $5.66 billion is an enormous amount of turnover,
only to be left with a loss at the end of it all.
Obviously
management are looking to remedy this, principally through an attempt to
realign the cost base to the reduced revenue base, which will hopefully bring
margins back to their average level of approximately 2.5%.
Our view is that 2.5% does not currently
look achievable, unless industry paper volumes start to pick up and pricing strengthens. At the very least, margins
will need to reach half this level in order to cover corporate costs,
interest and capital requirements. Otherwise, what is the point?
Onto its stock
The
company’s stock price has fallen to a low of 10c from a high of $5.85 reached
in 2003. This is always something that catches our eye. However in this instance, it is the company’s
preference securities (code: PXUPA) that are of more interest.
These
securities have a par value of $100 but are trading at $31 and are quite
complex instruments, the terms of which are not particularly attractive.
However, in respect of access to cash distributions or capital in the event of
a wind-up, they rank above the ordinary shares.
The
last 3 half-yearly distributions have been paid on the PXUPA, which are
yielding more than 20% at current prices, however we are not certain that
distributions will continue to be made given that the company continues to make
losses. Distributions are made at the discretion of the directors and are
non-cumulative in nature.
Orbis Investment Management,
the largest shareholder in PPX, has urged the company to suspend
dividends to PXUPA holders and use the savings to buy back the instruments
instead. In our view, this would not be an altogether terrible outcome
for holders of both classes of securities.
The
company currently has 12c per share in net
current assets, after the PXUPA have been paid back in full at par.
This implies a margin of $260 million in further current asset write downs or
operating losses before the asset backing of the PXUPA starts to get eaten
into, since they currently trade at $31. That’s a fairly substantial
margin, considering that the company reported an underlying loss after tax of
(only) $23 million this year.
So, where do we stand?
The company operates in a horrible industry
with terrible economics. In our view, it is at or near the bottom of the
earnings cycle. The company’s stock is trading as if it will continue on the
same path for the next 10 years, before finally disappearing into bankruptcy. However, we do not believe
that this will be the case. PPX has significant upside leverage to any cyclical
recovery and should by then have brought its costs back into line in order to
earn a reasonable margin on its sales.
Either
that, or it should continue to wind itself down and return its capital, most of
which is currently invested in inventory and receivables, to owners (first to
debt holders, then preference shareholders then, if there is anything left
over, to the ordinary shareholders). The bottom line is that the current PXUPA
price of $31 is discounting an extraordinarily pessimistic outcome
for this company over the next few years; however one that we do not believe
will come to pass.
Ed Comment: Well it has come to pass.
Danny
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COMMENTS
Does
PPX have the balance sheet capacity / cash to buyback the PXUPA’s?
Danny
Sandler September 8, 2011 at 5:52 am
PPX
has substantial capacity under their current funding facilities, however at
this stage, I don’t envision that the board would draw down on the company’s
debt facilities to conduct a buyback of the PXUPA at par. Orbis was referring
to them using their cash flow to buyback the securities on-market (at a
discount) instead of paying out the distributions.
Interesting
analysis as always. Definitely makes sense for PPX to buy them back at this
price instead of paying the coupons or converting into diluting significantly
into PPX equity. However curious as to what if any limitations are there to PPX
buying back the debt at a discount ? Would there be enough sellers? Would they
need to offer a price to all shareholders or just buy on the market and if so,
at what sort of premium to the current price? What is the end-game for SPS
shareholders as power really resides with PPX, holders of SPS are not in a good
position to sell close to par as they have no protection (unless PPX
liquidate)?
Danny
Sandler October 10, 2011 at 6:27 am
Certainly
liquidity for on-market purchases would be an issue. However I don’t see any
problems with them doing some type of off-market buyback offer made at a
discount to par (but at a premium to current trading prices). The end game is
for this business to return to some modicum of profitability and to resume
generating returns for shareholders. This business is not a growth business, in
which case those returns will need to eventually take the form of distributions
to shareholders, which can only occur if the SPS holders are also being paid.
You are right that power really resides with the PPX board, but their ultimate
responsibility is to generate adequate returns for shareholders.
class="avatar avatar-44 photo grav-hashed grav-hijack" v:shapes="grav-2052e16c62e5f366097b9e63dd112d19-0">daniel September 29, 2011 at 1:11 am
Is
there anything to prevent PPX withholding further distributions to PXUPA
holders – presumably leading to a price reduction – before buying them back
on-market?
'
class="avatar avatar-44 photo grav-hashed grav-hijack" v:shapes="grav-4edb72d7a9fec91f699bc1bd111d803f-2">
Danny Sandler October 10, 2011 at 6:16 am
Technically
not. Although it seems to me that the market is already discounting the risk
that the board will begin to withhold upcoming distributions.
I
was of the belief that PPX was “unable to conduct any capital management
initiatives (inc. buyback of securities) unless distributions were being paid
on the PXUPA”.
Surely
Orbis’ suggestion of cancelling distributions and then buying back the
securities (after they’ve plunged in price on the bad news) breaches this part
of the prospectus?
Cheers.
Cheers.
style='orphans: 2;text-align:-webkit-auto;widows: 2;-webkit-text-size-adjust: auto;
-webkit-text-stroke-width: 0px;word-spacing:0px'
class="avatar avatar-44 photo grav-hashed grav-hijack" v:shapes="grav-4edb72d7a9fec91f699bc1bd111d803f-3">Danny
Sandler November 16, 2011 at 8:49 am
Hi
Aaryn. That is a fair question. The PXUPA prospectus states that in the case of
non-payment of distributions, among other things, “PaperlinX must not: redeem,
reduce, cancel, buy-back or acquire for any consideration any share capital of
PaperlinX…”
The
key question then, is what constitutes ‘share capital’? Orbis is obviously of
the view that the PXUPA instruments do not constitute share capital of
PaperlinX. I tend to agree with them on this point.
Thanks
Danny. I’ve spoken to a couple of fund managers and PPX, it seems everyone has
a different interpretation of the document, though for the sake of conservatism
I’ll go with Orbis’ view. Ultimately we’re waiting on the results from the
Strategic Review over the next 6 months, though I have a sneaky feeling that
PXUPA will work out ok from ~$20. I’ve never held any PXUPA (or PPX), though I
think that these situations can prove highly worthwhile from an educational
point of view, and perhaps as a trade idea as the price falls.. I do note that
the market depth for PXUPA has improved dramatically today – an interesting
case study.
I don't believe PaperlinX will do a buy back. If they are to they will do it this year, but this seems unlikely. Unfortunately I also don't believe the company will redeem or realise the units either - not in the next 2 years. They will not recommence distributions either.
ReplyDeleteThe only situation that could change this is either much high volumes of core paper being sold international, weaker AUD (which is happening).
Note global paper paper sales has been in decline for 3 years and the prediction is for no increase. Maybe mobile computers reduce the need for paper. In October 2011 global shipments were 16% lower than Sept 11, and 5% lower than Oct 2010.
The other situation that could result in PaperlinX redeeming the units is if PaperlinX ceases head office operation in Aust and lists on the London share market. This is a massive move and I think they would want an improvement in profitability first.
Note PaperlinX and other paper merchants have been increasing their end sale price, but volume is way down.
Basically buyback is no longer likely and redemption at face value is also unlikely for a few years, nor is recommencement of distributions. I think the units may drop to below $17 if the world share market does not improve. Chins growth has now confirmed to have slowed, USA and European debt issues will take time to sort out.
Ed, whilst the loss of distribution is a kick in the guts, it's not as bad as you may think. When PaperlinX realizes or redeems the units, my understanding is they have to pay the last two missed distributions.
ReplyDeleteThe problem could be, even after the long awaited strategic capital changes due before June 2012, the hybrid units are not realised or redeemed.
Ordinary shareholders can't get any dividends, and hybrid holders sit in limbo with no cash-flow / distributions until the company makes profits or goes belly up.
One good thing about PXUPA is there is no major unit holders. It almost all small unit holders. If PaperlinX try to pass some extra clauses under the various remarketing
RIP 1 - excellent research. Very disturbing thus waning paper industry.
ReplyDeleteI think PaperlibX will get through. The Total Print Supply is proving to be a winner, and getting rid of sales reps is a step to the future.
Would be great to get feedback on the UK paper market and PaperlinX.
Feb 2012 will be the next big PPX announcement.
By the way the 13 May 2011 announcement to conduct an impairment valuation is what scared off the large investors. It is unjustified to later write off $188 m from the $250 m PXUPA. ACCC were soon involved. So the directors now known they are on thin ice; potentially they could have gone to jail if certain misleading efforts could be proven.
The industry is sick so witholding the distributions is probably justied for now.
It's a high risk share or unit to buy, but the rewards, if the company can survive and prosper, are also there to justify the high risk.
I think the new management are doing the right things