is pxupa a buy?, page-11

Yes, I was also amused to see PXUPA price fall so much again after the Friday bath, whilst ords closed unchanged given the hbrids have a higher ranking than the ords.

Various issues & opinions have already been highlighted in different posts since the company announcement on Friday, but I wonder if things are really as bad as the hybrids selling over last two days seems to imply! Let's look at the figures:

PPX Dec-10 HY balance sheet indicates net equity of $843m, of which hybrids (PXUPA) make up $276m, leaving about $567m as equity attributable to the ords shareholders. Let's take out another $27m for the expected FY11 net loss, and then even if the company writes down the whole of intangible assets (of around $318m) - which would be the unlikely 'doomsday scenario' - it still leaves $222m as equity for the ordinary shareholders, ie around 35c NTA per PPX share... after covering $1 for $1 (ie 100%) for PXUPA hybrids.

Of course, one might say that the company may have sufficient assets but it does not guarantee that the company will be making a profit (the point made by FIIG). There may well be some structural, as well as cyclical, changes the industry is going through that is causing problems. In my opinion the company, as a paper merchant, has a legitimate and profitable business model, and large enough revenue base derived from over 27 coutries it serves, therefore the only way it will not make profit is if the business is managed totally incompetently. Admittedly the recent performance of management is not something to crow about, but to be fair to them a part of the blame for the company's woes can also be placed on being caught out with high debt through the GFC, and being in a cyclic low for the industry for several years, and the rapidly rising $A. It also seems that the management has been working on some of the structural aspects by decentralising debt sourcing, streamlining corporate/regional functions, and generally improving cost-efficiencies (which are yet to flow through to the bottom line). No doubt, more needs to be done!

In my opinion, the turnaround in business performance is likely to become evident in FY12 as cost efficiencies from initiatives already implemented, and those that would have to be put in train in the near future, flow through to the bottom line, as well as the paper market hopefully starts to turn up from its cyclic lows.