Colour me successful integration?
19 June 2013Colorpak Limited (ASX: CKL) is an Australian company offering product packaging solutions - folding cartons, paper cups and lids, printed leaflets, printed blister and lidding foils, printed self-adhesive labels, sachets and point-of-sale displays.
In March 2011, the $50-odd million market cap company spent $5m to acquire Carter Holt Harvey's folding carton business. The acquisition would more than double Colorpak's revenue (to ~$210m pa) and to place the company on an equal footing with Amcor (ASX:AMC) in the folding carton space with a market share of around 30%. However the profitability of the new acquisition was marginal at best. For FY12, the company incurred $15.3m worth of restructuring costs mainly associated with the consolidation of manufacturing facilities and employee redundancies.
Fast forward to today. All up, Colorpak has spent around $11.5m on the CHH acquisition and its integration, including "profit made" from paying under NTA. The annual revenue has more than doubled but underlying NPAT hasn't been up nearly as much, increasing 20% from $6.4m (7.9 cps) in FY10 to $7.7m (9.4 cps) in FY12. FY13 profit is expected to be in line with that of FY12's result.
So why Colorpak? Macros aren't too good - manufacturing packaging is a mature, competitive, low-margin business. A return of equity of around 11.5% is also nothing to write home about. And there's overseas threats, both from fellow competitors but also local companies moving overseas and in the process abandoning the use of CKL packaging for their products. Not much to get excited about.
However, beneath the surface much work has been done with integrating the CHH acquisition and rationalising of the company's operations to make it a more meaner and leaner machine. Manufacturing facilities are being rationalised, staff numbers reduced, and formerly unprofitable contacts are being re-negotiated or let go. The margins are just beginning to turn around with EBITDA margins at 11.5% for the 1st half FY13 compared to the same period last year of 10.1% (note: margins are seasonally higher in the 1st half). In fact, management have started that the company has "seen the peak of the debt cycle and bottom of the margin cycle associated with the CHH acquisition".
I believe that Colorpak has completed the major portion of the hard yards associated with the CHH integration, and will start to reap the benefits of expanding margins in the coming years. The company's EBITDA margin fell from over 18% to 8.7% in FY12 post acquisition. One could make a guesstimate that in a couple of years revenues may decline 10% due to the cutting of unprofitable contacts while EBITDA margins may improve to 12%. This will result in an earnings increase of around 45%. Any additional margin improvements on top of this would just be adding rocket fuel to the fire. Not too bad for a company trading at an income-tax adjusted P/E of around 9, a history of growth and strong cash flows.
For further reading, there's a whole bunch of broker reports on the Colorpak website.
CKL last traded at $0.70.
Disclosure: At the time of publishing I own shares in CKL.