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Caxton CTP 12 September 2023

Navigating the cycle well

Strong FY23 results but tougher times are already here

Caxton’s FY23 results reflect the benefits of the pivot towards packaging and its balance sheet strength: HEPS was reported at R1.89, 20% higher than FY22, in line with our expectations. EPS grew 34% thanks to R79m profit from the sale of an investment holding in the media sector. A dividend of 60c (in line with our expectations), 20% higher than FY22 was declared.

Strong packaging performance: Group revenue grew 17% to R6,974m, Publishing, printing and distribution (PPD) was 7% higher (mainly supported by Commercial printing). Packaging and stationery (P&S) revenue was up 28%, driven by folding carton growth (Quick Service Restaurants and Bag-in-the-box). EBITDA was 18% higher at R981m (PPD -13%, P&S +25%) with the group EBITDA margin of 14.1% beating our estimate of 13.8%. This was due in part to well-controlled staff costs (+6.9%) and other expenses (+7.7), but also from flood damage insurance proceeds (R118m) offset by raw material write-downs as higher-grade paper’s prices have declined, higher insurance costs, and expenses incurred to bring machinery back into production (net positive impact of R33m).

The cycle turns: A combination of (now declining) inflation, higher interest rates and continual electricity loadshedding has conspired to soften demand from customers, particularly the smaller ones, across the segments in which Caxton operates. In PPD, local advertising and commercial printing are under significant pressure with 2H23 margins lower, although more robust national advertising is likely to partly offset this. In our view, the packaging sector is likely to be more resilient in this downturn although it is unlikely to defy the tougher operating environment entirely.        

For FY24e, revenue growth is expected to be in low single digits from the record FY23 base. Operating margins are likely to be influenced by the scale of further flood damage insurance proceeds but are expected to be slightly lower than FY23 excluding the impact of these receipts. Higher net interest income from cash holdings should provide some uplift to headline earnings. We raise FY24e HEPS to R2.15 (+14%) from R2.05 previously but cut FY25e HEPS to R2.19 (+3%) from R2.28 previously.

Our analysis suggests that CAT is still not priced for growth, evident in its packaging operations, but our lower future value valuation range (FVVR) reflects the tougher current operating environment. Our valuation metrics (PE ratio, EV/EBITDA and P/NAV) all indicate the share price is at a substantial discount to underlying value. In sum, we think that the current fair value is R15.40 (previously R16.00), rising to R17.00 (previously R17.50) one year from now. We believe sustained growth in the dividend would provide support to close the valuation gap between our valuation and the share price. 

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