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Standard Bank Group
Caxton CTP 27 March 2023

Impressive performance in1H23

Lifting both earnings estimates and valuation range

Caxton has released impressive 1H23 results to December 2022, lifting EBITDA by 29%, to R506m, and headline earnings by 33%, to R327m. Headline earnings per share climbed 36%, to 90.7c, from 66.5c in the prior period. As before, no interim dividend was declared.

The main performance driver was the Packaging & Stationery segment where the EBITDA margin improved from 14.3% to 15.8%, helped by market share gains and constraining operating expense growth at low single digits. A softer operating performance was delivered by Printing, Publishing & Distribution; here, the EBITDA margin fell to 13.5%, from 15.1%, due to flood damage repair costs that reduced the margin by 1.2%.

The balance sheet was substantially affected by higher net working capital requirements of R755m flowing from a high inflationary operating environment and the need to ensure adequate raw material supply in a tight market. Inventories and receivables were respectively 62% and 48% higher than in 1H22. Cash holdings were respectively 31% and 32% lower than in 1H22 and FY22 but, at over R1.1bn, the healthy balance sheet remained intact and cash balances are expected to rise over the next few reporting periods.

These results reinforce the superior growth trajectory of the Packaging division benefitting from strategic acquisitions, growth in the Quick Service Restaurant sector, and continued momentum in the liquor market. While the extent of the net working capital surge was surprising, it is likely that these levels will reduce progressively as the supply chain normalises and paper prices retreat from highs. 

Lifting FY23e HEPS estimates by 8%, to R1.88, and both FY24e and FY25e by 7%. Broadly, we expect margins to hold up for the remainder of FY23e (with some upside risk, depending on the extent of flood damage insurance recoveries) — although turnover growth is likely to slow. Operating expense growth is expected at around 12% for FY23e, while the effective corporate tax rate is likely to rise slightly to 23%, from 21%.

Valuation metrics still appealing. The current price-to-earnings ratio of 5.5x is still substantially lower than our warranted 9x PE, and the current EV/EBITDA of 3.7x is 23% below the fair multiple of 4.8x, and the current price/NAV of 0.53x is 21% below the warranted price/NAV of 0.67x. Overall, we think that the current fair value is R16.00, then rising to R17.50 by end FY24e. In the short term, a higher-than-expected dividend flow and/or significant corporate action with respect to the investment portfolio may help close this valuation gap. 


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