I've been following the PMP story for the last couple of years, and its been like watching a train wreck.
I'd like to commend Guarev Sodhi for continuing to write regular posts on PMP on investSMART, as I'm sure he would have been tempted to try to delete the company from his consciousness! I'd also like to acknowledge very insightful and often uncannily prophetic posts from
@jamwolf @madamswer @camden55 and
@Jimmy_C
The following was written in relation to FLT but I think it is relevant when thinking about the PMP journey over the last decade.
"The lesson for me so far has been quite different. It is that it can sometimes take a long time for slow-burn structural pressures to manifest meaningfully in earnings (although they manifest in ROICs much quicker) - particularly for market leading & well managed businesses that can buy out competition & gain market share off exiting traditional players.
The other lesson is that it is striking how long the market can ignore long term structural risks until they manifest clearly in short term earnings or (especially) declining revenue. It took 15-20 years for Amazon to start to really pressure many B&M retailers in the US, and traditional retailers' earnings & share prices were at all time highs as recently as 2yrs ago. The market completely ignored the risk until same store sales started to turn negative & profits started to fall. Stocks then got mercilessly hammered, but not before. No risk premium was applied in advance.
The same happened with traditional media. The market ignored cord cutting & OTT competition for an incredibly long time & offered no risk premium (even satellite pay TV coys were at 20x PEs), until subs started to decline. Then the stocks got crushed. The lesson is that the market will ignore long term structural threats if the 1-2yr revenue & earnings outlook remains good, until the tipping point is reached where revenues start to decline or earnings start to get hit hard. In FLT's case, such a tipping point would be a decline in TTV, but provided that possibility is seen as unlikely for the next few years, investors will ignore the risk. If it ever happens, however, the stock will probably fall 20-30% in a day, and if revenue declines become persistent, the stock will likely quickly de-rate to a single digit PE."
Clearly the above has well and truly occurred with regards to PMP, and I think quite rightly, the company is very much unloved in the investor community. This to a large degree has made me sit up and have a deeper dive.
The industry:
While the printing press is certainly in decline, I'd argue the its not in terminal decline. I've little doubt that in 20 years, there will still be catalogues coming through my letter box, I'll be looking through an 'astrawalker' type catalogue when our bathrooms need renovating, medical journals will still be printed, and people will be sitting out in the sun reading a book or newspaper (yes even those gen Yers). While the volumes will almost certainly continue to decline, someone will be producing their wares, and more than likely, making money out of it. Theres a lot written on the "value" of catalogues, and it doesn't take much thought to realise that the relatively low cost of a catalogue (maybe 50c) means that it only takes one catalogue enticing one customer to walk into Bunnings and spend a few hundred dollars (when they realise they'd also like a new blower vac and an outdoor umbrella while they're there), for it to be worth bunnings printing a few hundreds catalogues. The advertising landscape is changing and while some of the spend is moving away from TV and radio to online, theres also some of the spend available for outdoor and catalogue spend.
The competition:
I think its fairly safe to assume that given the bulk nature of the commodity, and the relatively low margins, we don't have to worry about overseas competitors printing out a JBhifi catalogue. Also the huge PPE costs and the declining industry will keep local competitors from starting up (unless margins get fat and juicy).
So as most will know the industry has consolidated from 5 to 2, and so the capacity has dramatically reduced. The 2 competitors PMP and IVE group, are both listed players that will want to grow profits. They're not here to fund growth. This will become a nice duopoly imo.
The valuation:
Current PMP has a MC of 115mil and will have about 35mil of debt giving an EV of 150mil. They are guiding for ebitda of 42.5mil so the have an EV/EBITDA of just over 3. Their net debt to ebitda is 0.8 (very manageable) and that is coming down quickly with net debt reaching almost 60mil 8 months ago.
c.f. IGL currently is guiding for EBITDA of 75mil and net debt of 125m with EV/EBITDA of 6 and net debt to EBITDA of 1.7.
Once the restructure is complete, I'd imaging the one offs from closing locations and retrenchment costs will fall dramatically, and the debt will be paid off quickly. This will further improve the EV/EBITDA metric.
PMP was guiding in nov for 19 ebitda of 70-80m. Now if we are very conservative and assume EBITDA stays stable at 42.5mil, then that will result in a margin of 5% on revenue of 800mil (cf IVE has an ebitda margin of 10.7%). The million dollar question then becomes what is the revenue going to look like in 2020. Well if we assume that companies continues to exist, the other alternative is catalogues are extinct, which I don't think will happen, then even if margins stay at 5% and revenues fall to 700mil, we still have an ev/ebitda of less than 3 once the debt is paid off. It doesn't take much to imagine revenues stable, now that reported price increases are being implemented, and margins settling at around 10%. This could see PMP making ebitda of 80mil quite easily. then rerate the stock to ev/ebitda of 5 (still v conservative in my book for a company operating in a cosy duopoly now) and we start getting a 4-5 bag from here...
Surely premature, but I'm gunning for that 7 year
purchase-cost-recoupment-via-dividends period record Adams achieved with SDI. Equally I'm waiting for a ISD like plunge next Monday!
* I've culled a bit of this assessment including NTA assessment, from my first attempt after accidentally closing the window and losing my last half hour...
(20min delay)