The combined PMP/IPMG will have about a 70% share of the Aus heat set printing market according to the below report, which to my mind limits the group's potential for significant new business.
To me the buy/sell/hold here comes down to two questions, which are inextricably linked: 1) what will the stabilized EBITDA margin be in the Aus print business post restructure?, and 2) how much further will the market shrink (will it continue to shrink 5-10% per annum as it has done for the last 6-7 years?).
If the market stabilizes at its current size, then the Aus print business in two years is probably throwing off $650-$700m at 15% EBITDA margins or thereabouts, which is $100m EBITDA, plus NZ and G&G may contribute another $20m EBITDA between them. I think one has to be somewhat optimistic to assume a sustainable post-2018 EBITDA margin in excess of 15% - PMP is the most efficient operator in the industry and they haven't managed that since 2011.
If the heat set print market continues to shrink 5-10% p.a., then you're probably looking at a business doing more like $600m revenue at 12-13% margins (the last $50-$100m revenue would be the most profitable, as you mention, due to the inherent operational leverage involved in heat set printing). I guess this is the scenario I lean towards, personally - looking into my crystal ball, I just don't see a sustainable future for catalogs (the sophisticated and large retailers like Coles, Woolworths etc., who are the big customers for PMP, will continue their migration toward electronic and personalized advertising based on individual shopper preferences revealed through loyalty card programs, social media and so on). The nightmare scenario for PMP is that a big customer like Coles one day simply decides to not renew an expiring catalog contract, and the longer time goes on, the less far-fetched that scenario is for me.
PMP Price at posting:
87.0¢ Sentiment: Sell Disclosure: Not Held
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