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Caxton CTP Limited 20 April 2022

Ready for value unlock

Overview: Caxton is a major participant in the South African print media industry and has established a strong competitive position in targeted packaging niches, with well-managed operations across South Africa. The group also holds ~34% of listed packaging group, Mpact. 

Leaner and fitter: The group has endured a very difficult publishing and printing environment that is now stabilising. Good volume growth is evident in packaging, and group margins look set to rise to pre-pandemic levels helped by restructuring and other efficiency actions taken over the past two years. 

Consistently cash positive, capital allocation favours higher-growth, higher-return packaging operations: Tight control over expenses and capital investment has enabled Caxton to maintain healthy operating margins through the pandemic, maintaining a positive cash flow. Capital allocation has swung decidedly to packaging in recent years and this is expected to continue given the more supportive environment and good market positioning.

Valuation looking attractive on all measures: In our view, the rebound in operating performance and earnings (SBGS FY22e HEPS +69%) lifts the fair value significantly and this is not yet being priced in by investors. Our current fair value for Caxton ranges between ~R12 (PE at 9x earnings, Price/NAV at 0.67x NAV) and ~R15 (EV/EBITDA at 4.8x multiple), R13 is our average fair value, rising to R15 per share at the end of FY23e. 

Getting the most out of a powerful balance sheet:  Caxton has operated with a cash-rich balance sheet in recent years that has enabled the group to make opportunistic investments (notably Octotel and Mpact) and now to build up raw material supplies. However, the ~R1.5 - R2bn cash surplus has been a consistent drag on group returns. We sense a more determined management focus on using the resources available to drive profitability and returns higher. Further significant value uplift is possible from returning capital to shareholders through dividends and (especially) share buy-backs.

Risks: Caxton’s business is partially dependent on national print circulation of newspapers and the availability and price of paper and board, which are affected by global pricing and rand volatility. Growth in SA disposable income is important to the investment case, which may be affected by political and social instability in South Africa.

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