The past year or so I haven’t had much to write about. While I feel the ASX is probably on the mark in terms of valuation, I can’t see a lot of positive news coming down the pipeline, which is why I’ve kept my powder dry as far as value opportunities go. I don’t see any point picking up a bargain if the ASX is going to fall 30% and take all the good stocks with it.
I recently bought a copy of Poor Charlie’s Almanack, which refers to the idea of waiting for a fat pitch. Investors frequently have a problem sitting still (I’m no exception, pumping money into gold shares instead of staying put), and instead of chasing marginal opportunities, just for activity’s sake, you’re better off waiting until you can swing hard when a pitch comes right in your strike zone.
I’ve kept BGL because of its stable earnings, and CKL remains in the mix because the company is in the process of swallowing a large acquisition and undergoing a transformation in the process. CKL’s preliminary FY13 results were released today and the business is now showing major progress towards its objectives:
- Revenue down 10.5% to 171.6M (due to dropping unprofitable CHH contracts)
- EBITDA up 8.8% to $18.2M (This is against underlying EBITDA last year, reported was 1.3M)
- EBITDA margin 10.6% vs 8.7%
- NPAT 7.5m down 2.2% (This is against underlying, reported NPAT was 3.2M loss)
- EPS 9.2c
- Cash flow $8.7m
So while the business has had to rationalise by eating some pretty big impairment charges over the past couple of years, since 2010 Colorpak has doubled turnover, managed to claw EBITDA margin back up to 10.6% against 18.2% in 2010, and now has opportunities to further optimise its cost base to further improve margins. Management aren’t sitting still, and have slated a consolidation of the Victorian operations, further reducing cost. Just a reminder, the CHH business cost $5m.
Meanwhile packaging giant Amcor is running NPAT margin of 3.4% on a turnover of 12.2B. Colorpak’s NPAT margin is currently 4.4%, but I believe management can get this back up to 8% within the next 2-3 years, which would generate NPAT of $14.4M on $180M revenue, and at 12x earnings would result in a market cap of $173m and share price of $2.12.
Returning to the strike zone, the recent appreciation of CKL’s share price 2 weeks ago (what a coincidence) and again today gives me a cumulative return of 30% over the past 2.5 years, not counting dividends, which have been around 5% per annum, for a total annual return of around 16%. The bulk of this has been earned in the past 2 weeks, as the market comes to recognise the success of Colorpak’s transformation.
I intend to continue holding for the foreseeable future, in expectation of a large-scale re-rate of the firm’s value, and may have to reward my patience with a tub of Connoisseur ice cream (look at the bottom of the package next time you’re at the supermarket).