17-05-2004 - Printing.com - Buy Printing.com at 28.5p - Newsletter
Buy Printing,com at
Buy Printing.com at 28.5p
With oil and house prices dominating the markets this week, it is refreshing to look at a successful company that won't be affected by such matters. Printing.com is a printing franchiser whose efficient low cost model makes it a superb growth story. It is in the final stages of restructuring its business model in order to reduce its costs and improve margins and cash generation. On an estimated 2004 PE of 19 falling to 10 in 2005, Printing.com is an undervalued growth play. Buy.
Company Background
Despite the name, Printing.com is not a website company. The dotcom merely reflects the use of the internet for relaying orders from its stores. The company offers cheap colour printing services to small and medium sized businesses. Menu-style pricing makes it easy for the customer to tailor make its own solution, and the company is very conscious about recycling and minimising waste. Check out the website and you'll see it has thought of everything.
Shares were oversubscribed in September 2000 when it began its Ofex life at 22p. Since then it has shown consistent growth but it is only now with fixed costs more than covered and operational gearing really kicking in that the bottom line will start to really impress. Before considering the franchise model, it is worth remembering that the Central Hub alone generated revenues of 1.7 million pounds last year and is estimated at 2 million pounds to March 2004. The original idea for this business came from CEO, Tony Rafferty, who began printing night club flyers. Two leading names from the pubs and clubs industry are customers of Printing.com and the company has been consistently upbeat in its most recent trading statements.
The Franchise Model
The ongoing restructuring at Printing.com will cut costs across the board and allow the company to focus on its newly relocated 30,000 sq ft Central Printing Hub which is to be supported by the territory franchises. The company currently operates 6 wholly owned stores (of which 3 are marked for sale), 22 territory franchises, and over 100 bolt-on subsidiary franchises. The aim is to establish a network of 175 bolt-on outlets by August 2005. Recently the company invested 5 million pounds in two state of the art printing presses for its Central Printing Hub and now has the capacity to handle orders which would generate 40 million pounds worth of revenues.
The franchises are targeted at people seeking to build their own business as an alternative to established printing chains. Each franchisee pays 115,000 pounds to build a business and is targeted to earn 100,000 per year, of which Printing.com receives 50%. The central hub sees annual sales of 3.4 million pounds in this manner. Bolt-on franchisees pay 5,000 - 12,000 pounds, plus additional fees in the second and third years, and contribute annual sales of 2.8 million pounds. Six wholly owned stores generate annual sales of 3.1 million pounds.
Printing.com Central Hub
Valuation
Printing.com has a proven track record of success. Sales in the year to March 31st 2002 hit 5.6 million pounds, then 7.7 million pounds in 2003. The interims to 12 October 2003 revealed a 22% gain in turnover to 4.7 million pounds and the company is likely to have achieved sales of 9.5 million pounds in the full year to March 2004. We expect those numbers to be published in June but a year end trading statement on 14th April leaves us feeling relaxed.
The company is financially secure, with net cash of 545,000 pounds at the half year stage. This has since been boosted by the sale of two stores to franchisees. The nature of the franchise model means that roll-out is inherently cash generative rather than cash consumptive so there is no risk of Printing.com passing the corporate hat around.
For the year just ended we expect pre-tax profits to have jumped by 80% to 900,000 pounds (worth 1.6p in earnings) and in the current year we are looking for profits of 1.6 million pounds (earnings of 2.8p). This model is scaleable and the overall (albeit highly fragmented) the printing market is worth around 1 billion pounds. So there is no reason for the growth to stop this year. Given that, the rating seems far from demanding.
We are slightly concerned that Rafferty dumped 400,000 shares last month at 30p. Rafferty refused to discuss the reasons for the sale with Unquoted-Analyst but he still owns 29% of the company so we don't regard this as a major drawback. Our other concern is that the company is considering a move later this year to AIM. Even assuming there is no fund-raising (and no cash is needed) that will add around 250,000 a year to costs - for a company this size that is a totally unjustifiable waste of cash. It is not as if a company valued at 11 million pounds (with a free float of just over 60%) is going to have Fidelity knocking at its door looking to invest wherever this company is listed. Hopefully Printing.com won't listen to its advisors and will stay on Ofex.
With those two caveats, Printing.com is still a buy. There is no reason why earnings in the year to March 2006 could not be somewhere close to 4p - for such a growth story a forward PE of 12 is far from demanding and that implies a one year target price of 48p. Buy.
Year Ended March Turnover (m) Pre-tax profit (m) EPS (p) PE
2002: 5.6 - 0.7 -2.2 -
2003: 7.7 0.5 2.2 13
2004: 9.5 0.90 1.6 19
2005: 12.6 1.6 2.8 10