Britain's Biggest Printer Going Cheap

Published in Company Comment on 15 February 2010

An out-of-favour value turnaround candidate.

There are some shares that perpetually crop up on value filters which you decide to ignore because something just doesn't quite feel right, and your gut instinct tells you that bad news is in the pipeline.

Printing group St Ives (LSE: SIV) has been such a share of late for me. Its basic value appeal on a discount to net assets, low gearing and low price-to-earnings ratio has to be tempered against the backdrop of dire economic circumstances and the declining industry in which it operates; after all, how much print do you see nowadays compared to, say, 15 years ago? And print is one of the first things to go -- or to be cut back on -- in leaner times.

Trust your instinct

Such sweeping instinctive judgements will usually help steer your investment decisions in the right direction -- and if you have any serious misgivings about an investment, why bother, there are always plenty more pebbles on the beach?

A printer recently told me that print is also one of the last things to come out of recession, that competition is fierce, margins thin, and the industry is rapidly contracting, regardless of the struggling economy, due to technological changes.

So it's all bad news then. But the time may now be right for contrarianly-minded investors to take a closer look at fully-listed St Ives. 

Poor sentiment seems to have passed its nadir, and things could gradually begin to look up for this, the UK's leading independent print and display group. This isn't reflected in the price at all so far; quite the opposite in fact. At today's price of 56p, the company is valued at £58m, yet has net assets of well over twice that amount, and net tangible assets a little under £75m.

Mixed news

Predictably, perhaps, the most recent news hasn't been sparkling.  January's trading statement was mixed. The company hasn't yet seen any signs of improvement in its underlying markets. The general economic climate remains uncertain and sales are expected to be lower in the first half than last year.

On the other hand, margins have improved, through cost-cutting measures and the concentration of efforts in higher margin areas. The company is confident of beating the previous year's bottom line figure for the first half which saw earnings per share from continuing operations come in at 4.2p. 

If this comes to pass, the shares will be trading on a price-to-earnings ratio of a maximum of 6.7. Meanwhile, the broker roughly concurs, predicting earnings of 7p this year rising to 7.9p next. This would be cheap by any standards but looks particularly appealing for value hunters in light of the balance sheet strength.

On balance

At the last count net debt at stood at £19m, with which the company was pleased given the cash spent on various cost reduction actions, and a special contribution of £14.4m made to the pension pot at the beginning of the year. The company also had over £14m in cash, good cash-flow, and £38m of the debt is pension obligations.  There is some surplus property and plant to realise, we are told, though this may take some time.

It isn't so long ago that the shares were north of £3. That may have little relevance today, but the 82p level reached back in June would seem to be a fairer reflection of value given the performance to date, potential for recovery and balance sheet strength. The prospective yield of over 4%, meanwhile, isn't too shabby, though it would have been comforting to see the directors showing some confidence by buying their own shares before the close period. 

What doesn't kill you...

It's said that that that which doesn't kill you makes you stronger. And this may be the case with St Ives today. 

The company has had to become leaner and meaner to survive, maintain profitability and do all it can to defend the strength of its balance sheet. It has shown an admirable determination to protect the interests of shareholders throughout the recession; a determination which could well bear fruit for value hunters timing their purchase well. All in all, the shares look significantly undervalued.

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abrahamisaacs 16 Feb 2010 , 3:38pm

Diabolical market. I was an interim financial controller for a printing company when the incumbent FC and FD were sacked. Yes it is a highly competitive industry. Labour intensive. Machinery intensive. Litho printers require loads of maintenance. Digital printers depreciate quickly. Paper and ink are both expensive and there is loads of wastage. Printers regularly go out of business or merge with stronger competitors. Frankly there are more attractive industries to invest in.

abrahamisaacs 16 Feb 2010 , 3:43pm

On the plus side, the fundamental need for printing is likely to be around for a while to come. Walk down any high street and you'll see printed signage in every shop window. Walk into Tescos and you'll see more printed signage and display boxes of shampoo and Gillette razors and yet more discount signage. Most of that is litho, not what you can do on your digital printer at home. BUT electronic signage is increasing and for the reasons stated in my last email there are too many kamikaze printers out there who are happy use up their shareholders' money by selling below cost until they go out of business.

geddinquick 28 Jul 2010 , 8:59am

"Frankly there are more attractive industries to invest in." I agree - but out in the world of contrarian investing, the shares have put on 50% and it's time to sell.

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