Printing cash with improving returns
#themes: Improving consumer sentiment, improving returns
Event: Caxton has released its FY24 final result. We review the company’s business model and update our earnings forecasts and valuation of the company.
Background: Caxton is a major participant in the South African print media industry and has established a strong competitive position in targeted packaging niches. With an initial focus on the publishing and printing of newspapers and magazines, the company has evolved through several astute and well-timed acquisitions and technological advancements into a leading publisher, printer and packaging manufacturer with operations in Gauteng, the Western Cape and KwaZulu-Natal.
The FY24 results: The group experienced a particularly tough FY24, with further declines in both print media circulation numbers and in media advertising revenue due to poor consumer sentiment and consumer spending constraints. Revenue for the period declined by 4.7%, to R6.647bn, and the operating margin declined to 9.9% (10.6%). However, helped by insurance proceeds of R173.2m (R118.2m) and interest received of R111m (R35m), HEPS increased by 4%, to 196.1cps. We forecast HEPS of 168.7c (-14.0%) and 179.0c (+6.1%) in FY25E and FY26E respectively, with DPS of 60c (n/c) in both FY25E and FY26E.
Strong balance sheet: Cash flow generation remains strong, and cash balances increased by a further R617m in FY24, resulting in cash and cash equivalents of R2.5bn. This balance sheet strength has enabled the group to make opportunistic investments and forge partnerships with outside parties – but the cash surplus has been a consistent drag on group returns. For example, the RoE of 9.4% achieved by Caxton in FY24E should be compared to an estimated return on net operating assets of 12.9% in that year.
Valuation: We use four main methods to determine our equity valuation range for Caxton, namely residual income (RI), intrinsic value (IV), DCF and historical PE. In all cases, we derived a value for the Caxton rump (company less its investment in Mpact and excluding cash and near cash holdings) with a discounted value of its investments and cash holding added back. The derived valuation range is between R16.91 and R18.72, providing an estimated total return of between 36% and 50%. If the value of the company’s cash and cash equivalents, together with its investment in Mpact, were returned to shareholders, we estimate that the share is worth an addition R2.64/share.
Key risks: Further declines in print-media circulation numbers to a point where retailers start to consider alternative avenues for advertising. Printed circulation of daily and weekly newspaper titles as well as magazines fails to stabilise and declines further. Abrupt increases in raw material costs and the inability to pass through price increases to its customers. Irresponsible pricing by competitors and the loss of market share. Currency weakness and the corresponding increased costs of imported machinery, spare parts and raw materials.
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