Colorpak’s management chose an upbeat tagline for their FY14 earnings presentation:
Heavy lifting of the final rationalisation all but complete – the stage is set.
So imagine my horror at seeing sales and EBITDA collapse after a positive FY13 result: Sales down 11% and EBITDA down 31%. Why? I suspect they are losing more CHH customers and finding challenges in the general market. Debtor days have also blown out from 48 to 56, which is starting to look pretty bad when mid 40s is about average for the IT industry (I can’t comment on the packaging business but assume most contracts are net 30 days as well).
EBITDA margins have now fallen to 8.9% from 10.6%, which is actually not that horrifying, although management are now outlooking a long-term EBITDA around 12%, which, if maintaining the same ratio as currently would correspond to a NPAT ratio of 4.3%, a far cry from my earlier prediction of 8%. Colorpak’s business has changed structurally since the CHH acquisition. My hypothesis is without this they might have lacked the scale to remain competitive, and be stuck with the choice of either shrinking and remaining profitable, or getting killed by an industry that has become too competitive. It’s interesting to reflect on this because I originally thought I was buying a quality business with some big upside, rather than a firm who needed to make a big acquisition to remain viable. All these ideas are pure speculation by me.
Bottom line for me is do I hold or fold? I can bin my shares now for a moderate profit. My plan is to continue holding for the following reasons: Management have done a pretty good job absorbing the CHH acquisition and they can see light at the end of the tunnel. They are almost complete transforming the business through plant rationalisations and other investments. They have flagged stable profit for FY14 with some underlying restructuring costs. FY15 profits are flagged as growing. New investments continue to be made in better plant and equipment.
After a 6 month period which is basically breakeven, CKL have managed to continue driving the business forward and now appear to be positioned well for the future. I maintain my faith that management will be able to get it done, and will re-evaluate in FY14.