Take two companies. One’s a global packaging giant worth more than $10bn. The other’s in the same game but has a market cap of just $50m. The Goliath is Amcor and as far as stable investments are concerned, it’s not a bad place to be. But size isn’t everything and in actual fact, the David of the two holds its own against Amcor in this part of the world.
The stock in question is Colorpak (CKL), which put out a reasonably decent set of numbers yesterday. The top line fell 10.9%, but the holes were plugged at the bottom line, which fell just 0.7% to $4.72m.
The company’s obviously feeling pretty good about itself, as the dividend was pushed up from 1.5cps to 1.75cps, generating a forward yield up towards 6%. This suggests that management’s more positive outlook isn’t reflected in the valuation. Indeed, at a PE of around 7X, we think there’s plenty of value on the table.
The key point to note is that the revenue decline represents the jettisoning of undesirable contracts from the 2011 Carter Holt Harvey Cartons (CHH) acquisition. CHH was run more as a charity than a business as far as some of its fast-food packaging contracts were concerned. Those contracts were flicked as soon as they refused to accept more commercial terms, which helped prevent the revenue contraction flowing through to earnings.
Management has also been busily rationalising production capacity. This has seen the closure of an old site in Sydney and a substantial reduction in headcount. This, in combination with the loss of low margin contracts, has driven a decent recovery in profitability. The EBITDA margin is now 11.5%, up from 10%, and there should be further margin improvement in future results.
Colorpak’s customer segments are primarily split between food (36.6%), pharma (26.8%) and beverage (18.9%). The pharma business is the most attractive because it’s tougher work to win due to the regulatory environment. This makes existing contracts “stickier” and also more profitable than basic packaging such as a burger box.
Growing the pharma business would certainly be a positive for Colorpak. But even without additional contract wins, the existing business provides attractive defensive qualities to the company’s earnings. With food and beverage potentially delivering some growth, in addition to the outlook for further margin expansion, Colorpak has the potential to benefit from both a PE re-rating of a point or two and underlying earnings growth.
That’s a prospect that’s always worth a look in our book.