The fundamental issues shown in this report are the reasons that I sold out. I certainly missed out by selling at 85 cent range, and therefore I was too conservative in my opinion as to the 'value' of PBG. However, the fundamental deterioration in margins, sales, interest coverage ratio were the reasons I got out.
Overall, my view on the report.
Good Points - Sales of continuing lines didn't deteriorate as much as was possible. Quite good to hold your ground in these circumstances. - On track with cost-saving program, if they can continue to achieve these savings then there are significant savings to come in 2010/11 - Reduced administrative costs --> perhaps an indication of cost-cutting program. - Positive 2nd half operating cash-flow. This is extremely positive news for PBG. - Forecast of positive operating conditions in 2nd half 2010
Bad Points - Likely to suffer due to currency, as their hedged positions come off and they feel the full force of the high currency (possibly may be a medium-term impact) - Even though they only experienced the full force of the currency in the 4th quarter, there was very significant deterioration in margins between 1st & 2nd half of year. 1st Half Net profit margin = 5.53%, 2nd Half = 4.68%. If we see this trend continue, perhaps it will be between 3.5% and 4% profit margin for 2010. - Interest coverage reduced from 3.5 to 3.2 (covenant at 3). If currency has serious impact on profitability in 2010, then they will potentially breach their covenant --> increased likelihood of another dilutive capital raising in that scenario. - Restructuring costs running significantly over budget --> 38% higher than budget for 2009. 35.7million more in 2010 & 2011 --> They better hope they truly get huge cost saving, as this is a significant cash cost to be putting on your business during a recession - $3000 retraining to each redundant worker....no doubt foreced to do this by unions to retain some degree of public image. - Reduced marketing spend --> Normally during tough periods you would try to at least maintain marketing, as it is even more vital in these periods. Suggests cash-flow issues. - Reduced equity from $2.39 to $1.39. At current price, you are paying nearly book value for a company with a very low ROE --> Overvalued? - Paid dividends in same year as issuing equity --> shareholder wealth destruction - Their calculation of 17.4 EPS is based on 587 million shares on issue (weighted average). Using true number of shares on issue (928 mil) the EPS are only 11 cents (1.20/11 = PE 11) - If business conditions due to currency headwinds really continue to deteriorate in 1st half of 2010, there is likely to be even further writedowns on goodwill. 1.5billion in goodwill remaining to produce profit of around 100 million is still excessive. - I don't believe restructuring is a completely abnormal expense. Such cost-savings can only occur in a business that has been operating at a sub-standard level, and has been complacent for a long-time. The positive side is that they are clearly aiming to fix this culture --> its still a difficult challenge. So I don't think you can really exclude restructuring costs from their underlying profit, especially not when you count the savings as profit. Therefore true profit is more like 20 million than the 100 million they claim.
Points to note - Cost of sales has gone up as % during 2009 (from 55.6% up to 57.2%) - Freight down marginally (7.1% down to 7%) - Marketing down (from 18.9% to 18.2%) - Admin down (from 8.37% to 8%)
Btw, I find it sneaky that they say claim cashflow of 183.5 million. The note attached to this figure is that this is cashflow before interest & tax.
Overall, it's not a terrible result, there is some light at the end of the tunnel, but there is likely to be more pain before things get better. I believe the 1st half report in 2010 will be even worse, and will drive the share price lower again. I will be watching closely, and will be interested if the price is driven down mid next year, as it looks likely there will be an improvement in business conditions for PBG from 2nd Half of next year onwards.
PBG Price at posting:
$1.19 Sentiment: ST Sell Disclosure: Not Held
