PROFIT AND LOSS ACCOUNTBy far the most striking aspect of the JH...

PROFIT AND LOSS ACCOUNT
By far the most striking aspect of the JH result was the Gross Profit Margin (GPM) of 50.4%, which is a massive 580 basis points higher than the prior corresponding period! This is the biggest rise recorded in the company's listed history (or in the decade that I have studied the company).
Clearly, the stronger A$ contributed to this phenomenon, but the last time the A$ appreciated by this sort of magnitude, between Jan 2006 and June 2008 (from 70c to 97c) the resulting GPM uplift was far more muted, going from 50.1% to 53.2%. In the past 12 months, with the A$ rising from just under 70c (it spent just a brief period at 65c) to a little over 90c, the GPM margin leapt from 44.6% to 50.4%. And this during a period where deflationary pressures are anecdotally ubiquitous. Either the exchange rate is a greater determinant on MCP's GPM than I had believed prior to this result, or MCP's scale grunt means it can command increasingly better distribution margins. I suspect it's a bit of both. Fact is, it will have been a source of material operating assumption upgrades in analyst models, I'll wager.

Offsetting the GPM sensation, was a very weak revenue number, down almost 4% on pcp. This, too, is unprecedented for MCP during its listed history.
(It srikes me as amusing that most analysts got the NPAT forecast - for what it's worth - just about right for MCP, but for the wrong reasons: their revenue assumptions were too high, but their GPM assumptions too low, two compensating errors helping them salvage professional credibility)

Other P&L Line items of note in relation to performance in the June half of 2010:
Expenses: very well managed with employee costs, rental expenses, cartage & freight costs, repairs & maintenance all relatively unchanged on JH09. Advertising/promotion costs were down $700k, but this was offset by a $1.0m increase in "Other" expenses. All-up, the sum of all expenses other than consumables & materials rose by less than 2%.
Interest Expense: down $1.0m to $3.7m on lower average debt of $77m (JH09 average debt = $114m)
Tax Rate: 29%, from 21% in JH09
EPS (pre restructuring charges): up 34%, to 16.9cps, from 12.6cps in JH09. So while, underlying EPS was up 9% for the full-year, this masks how strong JH2010 was in isolation. (In fact DH10 was actually down 5% on DH09)

BALANCE SHEET:
Inventories: finished the year at $64.3m, up 5% on the prior corresponding balance date. This is despite the 4% lower revenue recorded. The resulting Working Cap-to-Sales ratio has blown out to 24.5%, an all-time high (pcp = 22.9%). If the GPM performance was the most positive aspect of the result, this inventory build is the most negative point in an otherwise good quality result. The unfavourable trend in the Inventory-to-Sales ratio is a pressing issue in my mind, and something that I will monitor and raise when I get a chance to meet company officials:
JH04: 14.6%
JH05: 17.2%
JH06: 15.2%
JH07: 15.9%
JH08: 17.3%
JH09: 18.0%
Jh10: 19.6%
Not a healthy trend at all.

Borrowings: Consistent with prior years, no short-term borrowings. Non-current borrowings reduced impressively to $72m, from $83m @ 31 Dec 09 and $105m @ 30 June 2009. NIBD is $72m, down from $123m 18 months ago:
NIBD, DH08 = $122.8m
JH09 = $104.1m
DH09 = $81.1m
JH10 = $71.9m

NIBD is 1.5x EBITDA, down from 2.9x in pcp. My modelling has it falling - absent acquistions - to less than parity in DH2011. In a previous post on MCP I made the assertion that the business presents no organic growth prospects. This needs to be qualified by the balance sheet dynamic. Clearly, once MCP's balance sheet approaches a debt-free state, the board will be looking to embark on some form of acquisiton strategy (or it will sanction a return of capital). For the first time in years, either of these prospects will become the subject of conjecture for MCP within the foreseeable future (i.e., within the next 12 to 18 months). The last time MCP made a major acquisiton was in October 2004 when it acquired Multix for $70m, ($60m of which was cash). That deal took NIBD to $148m, and NIBD/EBITDA above 3 times. While I think the world has changed sufficiently after the GFC to suggest that no self-respecting board would countenance such a degree of indebtedness, MCP will in 12 months' time still have ample headroom to undertake a $25m to $30m sized acquisition (about 10% to 15% of the current company size, so it would have a reasonable earnings growth impact) without pushing the NIBD/EBITDA metrics beyond 1.5 times.

Retained Earnings: $72m, up from $67.6m @ 31 Dec 09, and $54m @ 30 June 09. Franking credit balance not disclosed, but will be higher than the $17.6m (24cps) recorded in the 2009 Annual Report.

CASH FLOW STATEMENT:
Net receipts = $27m, cf $31.5m in pcp, reflecting drag from the working capital build. OCF = $17.9m, almost 13x capex, and more than double the $7.2m dividend payments (corresponding to DPS of 10cps). Historically, OCF-to-capex has been > 5 times.

SEGMENTALS:
Revenue: Consumer Products revenue down 3.8% on pcp, Printing down 4.3%.
EBIT margins: Consumer Products recorded impressive performance of 16.3%, up from 11.2% in pcp. That's the GPM margin coming through again. Printing struggled (again!) with margin of 7% (pcp = 7.8%)

SUMMARY/CONCLUSION:
Besides the niggle of inventory build, this was a very high quality result that prompted me to revise upwards my assesement out the cash flow outlook for the companny.
Enough so to tip the stock into my BUY classification. I today bought a stake in the business and look forward to a long and fruitful period of shareholder value creation, commencing with the 10c rebate on my outlay to which I will become entitled, in a little over a week's time.

Prudent Investing

Cameron