Ann: Sales of PaperlinX Scandinavia, Spain & Ireland, page-15

I have said in previous posts that I believe the company is undervalued relative to future earnings. I however, think it is important to try to 'kill' your ideas to avoid permanent loss. With Paperlinx here are my top three things that may destroy it:

1) European bank/creditor debts are not able to be quarantined

I think this is less of a concern. Given the bank liabilities were backed by debtors, structure of interposed entities and the assertions by management it is likely that trade and bank payables are restricted to the European subsidiaries less 50% of Canadian sale cash

2) UK Pension liabilities are not able to be quarantined

This one is quite tricky. The UK Pensions Regulator (TPR) has the powers to impose liabilities on foreign companies but this is dependent on local courts approving and enforcing such action. This has not happened too often as you can imagine local courts are not so keen on enforcing foreign laws. Australia has a treaty with UK to respect certain laws so this is a possibility. However is a Australian court likely to force PPX into bankruptcy in order to satisfy the deficit? It is unlikely this will help anyone. My guess if it ever came to this PPX would be ordered to pay only the surplus cash it has (not much). Assuming this happens this would still mean in my view the value of the company would be materially higher than current levels

3) Declines in revenue and profit of the local divisions similar to what has happened in Europe

This is the most concerning as the long term trends are against us as less and less paper is used. Management have been good here keeping the cost base down and have done well to diversify into packaging and other non paper merchanting areas. In fact they have grown diversified revenues by 25% in 2014 - more than any other PPX division. This division has a good chance of maintaining and possibly increasing profits. At 3.5x EBIT (for all securities) however the market is assuming massive declines in income which does not seem warranted at this stage.

In summary there are a lot of unknowns in the situation and potential risks. I still believe that the risk/reward ratio is in our favour and will keenly wait for the annual report to be revealed in a few months. I will re-examine the thesis then

PXUPA held