Colorpak (CKL)

Mkt Cap: 52M
P/B: .85
P/E: 8
Div Yield: 5.1%

My first buy of the year occurred after offloading the last of my blue chips.

Colorpak designs and prints packaging, a decidedly dull and steady business.

Recently CKL acquired Carter Holt Harvey’s packaging business, for a mere $5m, funded from existing cash and debt facilities. The business is expected to add 125m rev and 4m EBITDA to CKL’s existing business, and increase EPS in the first full year of ownership (ie end June 2012).

This will bring on more clients for CKL, realise operational synergies, expand their offering to market to include the fast food industry, and expand their current market footprint to include NZ.

This acquisition looks to be an inflection point for the company, a view held by CKL’s executives. CHH’s acquisition will nearly triple CKL’s revenues and give them a market leading position to capture more of the market through additional acquisitions (CKL have made a number of acquisitions since 1998).

One such acquisition was made in 2010 of the Remedies printing business, which was in administration. This is expected to add another 1-2M of revenue and contribute to EPS over the next 12 months. This will also expand CKL’s offerings outside the folding packaging business.

In terms of folding cartons, CKL’s main business, CKL control roughly 11% of the market, with CHH and Amcor controlling about 25% each. The purchase will give CKL an equal market position against Amcor (who purchased part of CHH’s folding carton business as well) and dominate VISY (who control about 10%).*

Turning to Amcor, over 150 times the size of CKL, you see a vastly different balance sheet. Selling for twice book and 15.3 times earnings, AMC operates on a net profit margin of 4-5% compared to CKL’s of nearly 8.

Barring a major increase in price or major structural issue with the business, I plan to hold this into late 2012 when the CHH acquisition has been fully integrated. If the dividend yield continues to be high I plan hold past this date with the anticipation of further benefits through additional acquisitions and capture of additional growth and profitability through CKL’s increased size.

* It has been necessary to revise this article due to new information about CKL’s market share

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