I last wrote about PPX/PXUPA late 2013.
The company has since been sputtering along and as a result, the board has clearly had enough and has been busy over the last six months selling Spicers Canada, sacking CEO/MD Andrew Price and most recently deciding to close its European operations.
Paperlinx is a lot like Elders: a crappy business with a crappy capital structure. This hasn't stopped ELDPA in particular being a superb trade. I noted in August 2013 the anomaly of ELD outperforming ELDPA for several months (it made no sense to me why ELD should be worth anything while ELDPA was valued at only a little bit). Since then, ELDPA has moved up by 356% while ELD has moved up 204%.
Today we are not in a dissimilar situation with PPX and PXUPA. And with both stocks selling at pennies-in-the-dollar and the company now in drastic weight-loss mode, I think the situation is worth a closer look.
PPX: 665m shares @ 3.6c = $23.9m
PXUPA: 2.85m shares @ $9.50 = $27m
The face value of PXUPA is $100 per share (or $285m) however the market cap is less than 10% of that. So with PPX at $23.9m, I guess the market is punting lottery ticket style that assuming the company survives and PXUPA holders agree to a big haircut or the company does REALLY well that PPX shares might actually be worth something.
The company has traditionally had three operations: Europe, Canada and Australasia. Canada has been sold. Europe has long been a cancer to the business, however this is now being finally cut-out with businesses either being sold-off or placed into administration. The company has noted on several occasions that ANZA is financially separate from Europe. On this basis and assuming no skeletons in the closet (a big call), the slimmed-down company ought to be okay. FY2014 underlying EBIT for ANZA was $15.3m and has actually been pretty good: underlying EBIT for the last few years are FY13 $12.6m, FY12 $14.9m and FY11 $11.1m. Corporate costs have been tracking around the same level as the profit of the ANZA business, however that of course should be slashed drastically especially as Europe winds-down.
On a simplistic basis, wiping out Europe from the balance sheet and adding the C$63m from the sale proceeds of Spicers Canada to the net assets for ANZA of $146.7m (A $225.2m and L $78.5m) adds up to $209.7m - which is still well short of the face value of PXUPA. Looking at it another way, assuming corporate costs get wiped out entirely, ~$15m EBIT can't service interest on the remaining debt and potential PXUPA interest obligations (4.65% + BBSW - ~$18m p.a.). So even on a slimmed down basis it's hard to see much equity value left for PPX at the moment. It is much easier to see a very big capital raising for PPX to help pay down debt and try and come up with a deal for PXUPA holders. Note we have seen multiple capital raisings at ELD which have only helped ELDPA.
The company has since been sputtering along and as a result, the board has clearly had enough and has been busy over the last six months selling Spicers Canada, sacking CEO/MD Andrew Price and most recently deciding to close its European operations.
Today we are not in a dissimilar situation with PPX and PXUPA. And with both stocks selling at pennies-in-the-dollar and the company now in drastic weight-loss mode, I think the situation is worth a closer look.
Note the performance since the shares begun trading again April 15: PPX is up 106% v PXUPA up 34%. Again, this doesn't make sense to me. PXUPA stand in front of PPX for dividends and a wind-up, however PXUPA is being valued at 9.5% of face value yet PPX doubles in value, while PXUPA 'only' goes up by 34%? Someone is wrong here. Here are the market caps of PPX and PXUPA:
PPX: 665m shares @ 3.6c = $23.9m
PXUPA: 2.85m shares @ $9.50 = $27m
The face value of PXUPA is $100 per share (or $285m) however the market cap is less than 10% of that. So with PPX at $23.9m, I guess the market is punting lottery ticket style that assuming the company survives and PXUPA holders agree to a big haircut or the company does REALLY well that PPX shares might actually be worth something.
The company has traditionally had three operations: Europe, Canada and Australasia. Canada has been sold. Europe has long been a cancer to the business, however this is now being finally cut-out with businesses either being sold-off or placed into administration. The company has noted on several occasions that ANZA is financially separate from Europe. On this basis and assuming no skeletons in the closet (a big call), the slimmed-down company ought to be okay. FY2014 underlying EBIT for ANZA was $15.3m and has actually been pretty good: underlying EBIT for the last few years are FY13 $12.6m, FY12 $14.9m and FY11 $11.1m. Corporate costs have been tracking around the same level as the profit of the ANZA business, however that of course should be slashed drastically especially as Europe winds-down.
On a simplistic basis, wiping out Europe from the balance sheet and adding the C$63m from the sale proceeds of Spicers Canada to the net assets for ANZA of $146.7m (A $225.2m and L $78.5m) adds up to $209.7m - which is still well short of the face value of PXUPA. Looking at it another way, assuming corporate costs get wiped out entirely, ~$15m EBIT can't service interest on the remaining debt and potential PXUPA interest obligations (4.65% + BBSW - ~$18m p.a.). So even on a slimmed down basis it's hard to see much equity value left for PPX at the moment. It is much easier to see a very big capital raising for PPX to help pay down debt and try and come up with a deal for PXUPA holders. Note we have seen multiple capital raisings at ELD which have only helped ELDPA.
I recently read a good blog post from Canada demonstrating the link between a clean capital structure and share price performance. As a generalisation this makes some sense. Lots of share issues, options, use of preference shares all show either a company in lots of need for finance and/or management being a bit clever with finance and not just growing a business. Compare that to a company with a relatively low and stable number of shares on issue tightly held by management: supply and demand dictates that if the company is doing well, the small free-float will be highly sought after by the market. PPX/PXUPA doesn't fit this category! These difficult situations are just that - difficult.
However after following this situation for years, I finally mustered the confidence to buy a few PXUPA. This is probably more out of curiosity to see how this all finally pans out!
Kristian
Disclosure: own PXUPA
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