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02-01-2004 - Printing.com - Printing.com shows promise - Citywire Subscription

Results and trading statements issued during the Christmas period often
contain information directors would prefer investors not to see. But positive news that likely went unnoticed came from Printing.com, an Ofex-listed retail and business services group that designs and prints leaflets, letterheads and business cards.

A 23 December announcement said the stronger trading experienced since the end of summer had continued in the eight weeks after the close of the interim reporting period (to 12 October).

I am interested because Printing.com is potentially one of those attractive retail-oriented growth shares where a successful concept can be rolled out to deliver an attractive phase of earnings growth. The company has already invested in a new production facility that lends competitive advantages and increased scope as outlets expand. Work uses four colours instead of two and delivery is usually three days. I can testify to the high quality of its business cards as an example.

'Especially encouraging' was the four-week period ending 7 December when the group exceeded total retail sales of £1 million a month for the first time, against £770,000 like-for-like.

Growth is coming mainly from franchised stores rather than company operated, in an estimated £1 billion market. The operational review in the 10 November interim statement said that like-for-like sales had been flat across the company's estate, compared with 20% growth the previous year.

At interims the directors cited eight more franchises, taking the total to 48, against 12 company-owned stores. They are optimistic about achieving their objective of 175 outlets by August 2005 - an ambitious target but one where the boost to sales could transform the shares at 32.5p.

As yet, Printing.com's financial profile makes its shares look 'up with events'. The group is growing off a relatively small financial base, so impressive percentages are to be expected. Interims showed a 69% rise in operating profit to £388,000 on turnover up 22% to £4.8 million, with pre-tax profit up 57% to £251,000. Market capitalisation is £12.6 million which seems high enough but hints at the potential for a successful rollout.

A deferred tax charge of £75,000 against a like-for-like credit of £48,000 mixed up the interim bottom line result, but growth momentum was clear.

A statistic at the end of the 23 December trading statement conveyed a sense of the market opportunity. 'Despite rapid growth in total retail sales, it is estimated that the Printing.com volumes are under 20% of those of the market leader and about 1% of the available market.' All this implies a fragmented market, albeit a competitive one too.

You would think this type of operation, serving mainly small businesses with their marketing efforts, would be highly sensitive to economic change. Yet in the early months of 2003, when confidence was under pressure ahead of war in Iraq, Printing.com achieved progress that beat expectations.

Obviously one needs to treat this kind of statement with a pinch of salt, lest expectations were conservative in tight economic conditions. But the episode indicates one cannot assume Printing.com is just another cyclical marketing services share.

Hardman, a research group, had (before the 23 December trading statement) a full-year forecast of just over £1 million profit for the year to end-March 2004. It regards the recent tax charge as 'an accountancy issue rather than a cash one', adding 'Printing.com pays no tax and is unlikely to do so for some time yet.' This is not very clear because Hardman then cautions about a reduction in earnings from 2.2p to 1.8p, 'entirely due to the adoption of a full tax charge'.

It also cautions about changes in Printing.com's structure, with territory franchises being awarded instead of high street retailing franchises, and bolt-on franchises coming under territory franchisees. This does not appear a criticism simply that it creates short-term cash flow uncertainty until one can see the effect of the changes in the numbers.

Although such a projection puts the shares on a prospective p/e in the late teens for Printing.com's current financial year, I regard the key issue as whether management can deliver serious progress with the rollout. That will guarantee more interest from investors and the company is well worth monitoring.

To learn more about Printing.com and check its share price, see
www.ofex.com.