24-02-2006 - Printing.com - "To Buy and to Hold" - Stock to Watch - iii.co.uk
One of the dilemmas of growth share investment is determining what represents the right level of risk/reward to buy in. If you buy into an unproven company when its shares are rising on hope, the price will plunge if hopes are not met. Conversely, as a track record gets established, waiting for an ideal pricing opportunity risks the shares running away from you. Is there an intelligent compromise?Perhaps the best you can aim for is to identify worthwhile companies for the long term and guard against paying too high a price.
In this respect, Printing.com merits attention. As you might expect for a smaller printing services group, the fear that it might prove more of a cyclical business makes for some volatility. But assuming the UK economy does not slide, the company's track record and prospects ought to put it on your growth share radar.
Capital gains tax efficiency
The shares' AIM listing offers business asset taper relief, i.e. capital gains tax effectively reducing to 20% after one year and 10% after two years, at a time when the business' risk/reward profile is starting to look more attractive than various fully listed small caps.
Retail outlets
Printing.com is listed under Media in the sense that its focus is consumer and small business print products - mainly stationery - yet its high street presence lends the flavour of a retailer. There have been repeated UK growth share success stories involving a retail concept being rolled out. When the company reported interims last November it had 147 outlets open and pending; 28 of which were opened since March 2005. This indicates good commercial momentum that ought to sustain financial performance. The strategy combines company owned stores with franchises and includes a central printing hub in Manchester with rapid turnaround of orders; this is being upgraded with a new press in April and 50% extra floor space.
There was a 25% rise in total retail sales to £9.4m in the seven months to 16 October - a good sign of a growth business - and management envisaged "no reason why the remainder of the financial year should not perform in line with our internal budget." Company REFS shows the consensus market forecast (representing Brewin Dolphin, the company&aposs broker, and Hardman & Co which produces sponsored research) as £2.4m pre-tax profit for the current financial year to end-March and £3.3m in 2006/07 - up from £1.5m profit in 2004/05 after the company broke even around late 2002. At 68p a share this gives a historic p/e of 25 and a rolling 12-month forward p/e in the late teens.
Overseas expansion
On the face of it the shares look high enough considering this is still a £30m company not immune to the risks of smaller business. Printing.com is extending its franchising overseas which could be interpreted as awareness of limitations for UK expansion plus embracing the classic risks of expanding abroad. The chief executive sold 2.6m shares at 68p last December, which looks like prudently tucking away some profits, although it was said the sale was at the request of the company�¢ï¿½ï¿½s broker to meet "strong institutional demand".
Dividend policy
Yet the chief executive continues to hold over 9m shares (20.3% of the company) and institutions are buying into a fairly illiquid share: note that Printing.com�¢ï¿½ï¿½s normal market size is 1,000 shares. It will most likely be easy to buy more but you should always bear in mind a share�¢ï¿½ï¿½s "NMS" in the event of a downturn and needing to sell. It is therefore interesting that despite this, institutions appear happy to buy or add to their holdings. One reason could be Printing.com�¢ï¿½ï¿½s dividend policy, which suggests strong financial disciplines - a vital issue for a growth company. ���£222,000 of the ���£775,000 after-tax interim profit was distributed as dividends; obviously this policy benefits the chief executive in particular and other directors with meaningful stakes.
Essential business
Printing leaflets, booklets, business cards and letterheads is a fragmented industry, said to be worth around ���£1bn in the UK, offering potential to establish a dependable retail brand. Moreover, unlike fashionable growth concepts or technology or roller coaster resources plays, stationery is an essential product for business and various consumer requirements too.
Printing.com is not the kind of growth share that is ever likely to have investors salivating over prospects, with its price shooting to very expensive levels. Yet as a two-year lock-away to gain advantage of accelerated taper relief on AIM, it is well worth considering.
The price has recently moved back up to test a 70p range again, after a dip to 60p in January. There was also a fall from a 50p range to 37p a year ago, then a strong rally. Discerning buyers may prefer to stay patient for a better opportunity, however in a few years�¢ï¿½ï¿½ time it may easily be the case that you look back on Printing.com as an emerging growth share you missed