FY22 earnings delight

Strong income statement performance: Caxton has released FY22 results that show it has been able to navigate difficult operating conditions in style. Although revenue was largely in line with our expectations, margins were noticeably higher in both publishing, printing and distribution as well as in the packaging and stationery segments, even as raw material prices escalated in a constrained supply environment. Good cost control was evident again, headline earnings and HEPS grew by 104% and 108% respectively, soundly beating our expected HEPS growth of 72%, partially helped by higher-than-expected dividend received. However, net cash flow suffered from necessarily higher raw material holdings, and the 50 cents dividend declared was considerably lower than the 67 cents we were expecting. 

Lifting earnings forecasts: The base earnings level has certainly been raised in these results and we think the margins achieved, reflecting the group’s strong position in the marketplace, are likely to be able to be held with some upside risk as cost-recovery price increases continue. We lift FY23e HEPS to R1.74 from R1.52 previously (14% higher) and FY24e HEPS to R1.92 from R1.71 previously (12% higher). Overall, we expect HEPS growth slightly in excess of 10% for each of our forecast years to FY25e. However, we cut our dividend forecasts in FY23e (to 60 cents from 70 cents previously) and in FY24e (to 65 cents from 67 cents previously). 

Valuation: The share price performance over the past few months has not matched the improvement in results and the earnings-based valuation metrics for Caxton remain compelling, far below the fair PE of 9x HEPS and fair EV/EBITDA of 4.9x. The fair price/NAV per share of 0.67x is also well ahead of the current 0.53x ratio although the 5.6% current dividend yield may not be too appealing to income investors in a rising interest rate environment. By applying the warranted multiples above, we think current fair value is R12.50 rising to R15.50 at the end of 2023.

Catalysts: Having clearly stated its wish to merge the Caxton and Mpact packaging operations, we think the substantial (34%) holding the group has built up in listed packaging group Mpact creates some uncertainty for investors, certainly in respect of the potential call on the cash firepower on the Caxton balance sheet. In our view, until there is improved clarity on prospective corporate action by Caxton in respect of Mpact, investors may exercise caution. We also believe that the adoption of an unambiguous dividend policy for investors to “hang their hats on” would provide a much-needed link between earnings and dividend flow. We are firmly of the view that the resolution of one or both of these uncertainties will provide impetus towards a much-deserved share rerating.

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