Since my last post, PPX have indicatively offered 250 PPX shares for each PXUPA. PPX is currently 5.2c, valuing the PXUPA offer at $13. The offer helped PXUPA get out of its sub $10 funk and is now also trading at $13. The offer is well below the market rumours of $20, however this is minutiae: the majority of PXUPA holders are extremely unlikely to accept the offer whether it is $13 or $20.
The Mexican stand-off will continue.
So where is this all going to end? Obviously it could end in tears if the company goes under and certainly both PPX and PXUPA are partly being priced for that scenario.
Back in 2011 there was an indicative offer of $21.85 for PXUPA and 9c for PPX from a third party. Now the offer for PXUPA is being made by PPX itself. This is potentially the canary in the coal mine: If I was running PPX and thought the business had turned the corner, I would most certainly be looking to buy PXUPA on the cheap now. When/if cash-flow starts picking up, it will be even more difficult to PXUPA holders to sell the stock cheap. Therefore for today, let's imagine the scenario of Paperlinx getting back to profitability. To make it clear: I have absolutely no idea at this stage if this scenario is likely. I just want to see how the picture looks like if this scenario occurs.
Listed below are some recent historic profitability measures:
Despite a lot of trimming, Paperlinx is still a big business. Even just a small improvement in margins or perhaps closing the European operations or whatever would see the business making some half decent money. It's not difficult to see the business making $20m+ p.a. just by tweaking Gross Margin % by a few notches (pre-distribution payment to PXUPA holders) if things come together.
Okay, so cash starts coming in and management want to start paying dividends back to shareholders. Distributions must first be paid to PXUPA holders. The distribution rate on PXUPA is the 180 Day Bank Bill Swap Rate plus 4.65% = 7.3% p.a. There are 2.85m PXUPA on issue so the cash distribution would be $20.8m p.a. Obviously if distributions are re-commenced, PXUPA would be significantly re-rated from $13. The alternate scenario is for PPX to just buy back PXUPA at more reasonable levels. On the assumption nobody participates in the current indicative offer and everyone participates in say a $70 offer at some point in the future, the cash required is ~$200m.
This would probably need to come from a capital raising. The current market capitalisation of PPX is $31.7m. So adding another $200m in market capitalisation gives a PPX market cap of $231.7m and an earnings multiple of 11.6. The numbers will look even better if some people participate in the current offer and perhaps a few can be bought back on-market at a later stage.
To reiterate, this is all speculative based on a scenario that may or may not happen.
For me, I am trying to avoid companies producing no cash, hence why I am not in either of these stocks. Things can get really ugly when cash flow dries up and there have been enough other opportunities to make money from. However you can see the potential upside in PXUPA should the company start producing cash and hence why many PXUPA holders are just choosing to hang on.
The Mexican stand-off will continue.
So where is this all going to end? Obviously it could end in tears if the company goes under and certainly both PPX and PXUPA are partly being priced for that scenario.
Back in 2011 there was an indicative offer of $21.85 for PXUPA and 9c for PPX from a third party. Now the offer for PXUPA is being made by PPX itself. This is potentially the canary in the coal mine: If I was running PPX and thought the business had turned the corner, I would most certainly be looking to buy PXUPA on the cheap now. When/if cash-flow starts picking up, it will be even more difficult to PXUPA holders to sell the stock cheap. Therefore for today, let's imagine the scenario of Paperlinx getting back to profitability. To make it clear: I have absolutely no idea at this stage if this scenario is likely. I just want to see how the picture looks like if this scenario occurs.
Listed below are some recent historic profitability measures:
Despite a lot of trimming, Paperlinx is still a big business. Even just a small improvement in margins or perhaps closing the European operations or whatever would see the business making some half decent money. It's not difficult to see the business making $20m+ p.a. just by tweaking Gross Margin % by a few notches (pre-distribution payment to PXUPA holders) if things come together.
Okay, so cash starts coming in and management want to start paying dividends back to shareholders. Distributions must first be paid to PXUPA holders. The distribution rate on PXUPA is the 180 Day Bank Bill Swap Rate plus 4.65% = 7.3% p.a. There are 2.85m PXUPA on issue so the cash distribution would be $20.8m p.a. Obviously if distributions are re-commenced, PXUPA would be significantly re-rated from $13. The alternate scenario is for PPX to just buy back PXUPA at more reasonable levels. On the assumption nobody participates in the current indicative offer and everyone participates in say a $70 offer at some point in the future, the cash required is ~$200m.
This would probably need to come from a capital raising. The current market capitalisation of PPX is $31.7m. So adding another $200m in market capitalisation gives a PPX market cap of $231.7m and an earnings multiple of 11.6. The numbers will look even better if some people participate in the current offer and perhaps a few can be bought back on-market at a later stage.
To reiterate, this is all speculative based on a scenario that may or may not happen.
For me, I am trying to avoid companies producing no cash, hence why I am not in either of these stocks. Things can get really ugly when cash flow dries up and there have been enough other opportunities to make money from. However you can see the potential upside in PXUPA should the company start producing cash and hence why many PXUPA holders are just choosing to hang on.
Kristian
Disclosure: no position in PPX or PXUPA
Disclosure: no position in PPX or PXUPA
Hi Kristian, Paperlinx is now just an ANZA business, annual EBITDA 18m, after they have let the European loss making entities fail, and hopefully net cash is about 40m after the Canada sales (they kept half of it), Mcap of common is 23m at 3.5 cts and hybrid 28m at 10%, what do you think could happen?
ReplyDeleteLooking at it now.
ReplyDelete