PMP Research Sep 2013

PMP Ltd

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Transformation delivering benefits. Investment case on track. ASX Code PMP

Share Price cps 33.5 Year end June 30th Investment data

FD No. of shares 323.8 Market Cap ($m) 108.5 Enterprise Value ($m/ FY14e) 181.1 12m price range ($min-$max) 0.13- 0.38

DCF (cps) 0.48 (43% premium) Chair Matthew Bickford Smith

Managing Director Peter George Chief Financial Officer Geoff Stephenson

Financials ($m) FY10 FY11 FY12 FY13 FY14e FY15e FY16e

Revenue 1221.4 1205.4 1100.4 1008.9 908.0 887.3 869.0

EBITDA 92.8 100.1 76.5 72.2 60.0 55.0 52.0

NPAT 20.6 -11.3 -24.5 -69.7 0.3 14.6 19.0

NPAT Normalised ($m) 24.5 28.7 8.8 14.8 12.2 14.6 19.0

EPS basic (c) 6.2 -3.4 -7.5 -21.5 0.1 4.5 5.9

EPS Normalised 7.5 8.6 2.7 4.6 3.8 4.5 5.9

PE Normalised (x) 4.5 3.9 12.4 7.3 8.9 7.4 5.7

DPS (c) 1.0 1.0 1.0 0.0 0.0 2.3 2.9

Dividend Yield (%) 3.0% 3.0% 3.0% 0.0% 0.0% 6.7% 8.8%

Free Cash Flow (excl. asset sales) 32.9 64.4 55.1 -16.2 19.4 38.3 37.0

FCF per share 9.8 19.3 16.9 -5.0 6.0 11.8 11.4

Net Debt 168.1 141.0 143.3 92.1 72.6 40.9 12.7

Capex 30.9 39.7 -23.7 23.7 6.0 6.0 8.0

FT Employees 2678 2622 2159 1587

Normalised ROE (%) 6.5% 8.1% 2.7% 5.8% 4.7% 5.3% 7.0%

EV/EBITDA (x) 3.0 2.5 3.3 2.8 3.0 2.7 0.2

FCF/EV (%) 11.9% 25.8% 21.9% -8.1% 10.7% 25.7% 30.5%

Growth metrics Normalised NPAT (%) 30% 17.1% -69.3% 68.7% -17.6% 19.3% 30.3%

EBITDA pre sig Items (%) -4.0% 7.9% -23.6% -5.6% -16.9% -8.3% -5.4%

Revenue (%) -9.9% -1.3% -8.7% -8.3% -10.0% -2.3% -2.1%

Normalised EPS (%) 30.3% 14.7% -68.6% 70.4% -17.6% 19.3% 30.3%

Michael Brown T: +61(2) 9240 6607 E: [email protected] W: www.pegasussecurities.com.au September, 2013

PMP Ltd is an advisory client of Pegasus Securities Pty Ltd. PMP has commissioned Pegasus Securities to prepare this research report on an independent basis. PMP does not approve or endorse this research report and has not provided any price or other market sensitive information to Pegasus Securities.

PMP Ltd


Investment case on track Despite cyclical and structural challenges, weak volumes and price pressure caused by industry overcapacity, PMPs FY13 results exceeded company guidance and our expectations. The results also confirm that PMPs transformation strategy is well underway and is delivering the expected benefits. Costs are coming down, cash flow is strong and debt is being retired. The first stage of our investment case is on track. Since Peter George took over as CEO of PMP some eighteen months ago, $62m of annualised costs have been taken out of the business. A further $17m of cost savings, Phase 3 Transformation, are slated to begin this October. $74.8m of assets and properties have been sold. Head count fell by 572 FTEs during FY13 alone, -26.5% of the workforce. A further fall of around 180 heads is expected in FY14e. A leaner and less indebted PMP is emerging.

FY13 Results highlights FY13a Pegasus estimate

Company guidance FY12a Change vs pcp %

Revenue 975.8 961.0

1093.9 -10.8%

EBITDA pre Sig items 72.2 70.0 69-72 76.5 -5.6% EBITDA Margin pre Sig items 7.4% 7.3%

7.0%

EBIT pre Sig items 34.4

32.7 5.2%

Sig item pre tax 88.5

41.1 NPAT pre Sig item 14.8

8.8 68.2%

NPAT post Sig item -69.7

-24.5 EPS pre Sig item 4.6 3.7

2.7 70.0%

Net debt 89.1 93.3 90-95 143.3 54.2

FY13 Operating revenue came in at $975.8m, $14.8m ahead of our estimate. Down 10.8% versus pcp.

EBITDA pre significant items came in at $72.2m. Company guidance was $69m-72m. We estimated $70m.

2H FY13 result included $13.1m of profit contribution from the now completed $37.1m Phase 2 Transformation cost savings plans. $25m more of Phase 2 savings should flow into FY14.

Net debt fell in FY13 from $143.3m in FY12 to $89.1m. Company guidance was $90m - $95m, Pegasus estimate $93.3m.

Free cash flow increased to $54.3m including $43.7m cash restructuring costs and $74.8m of property and asset sales.

The companys strategy is to reduce costs, improve competitiveness and retire debt. Industry consolidation at accretive prices could follow. In the FY13 results we also see signs that the second leg of our investment case is unfolding. Centred on catalogues, which are proving a relevant and resilient part of retailers marketing campaigns, we believe PMP can build a sustainable and profitable business model. Catalogue volumes; at over 8.3bn p.a. have grown by an average of 2.1% p.a. since the GFC. In independent industry surveys catalogues have been rated as the most effective mass market media in eight out of the ten leading consumer goods categories. Moreover, the market is evolving. Integrated offerings where new online media combine with catalogues, rather than replace them, are gaining traction. PMP has a national footprint, fast speed to market and can offer customers an end to end service from design to delivery. Perhaps Integrated Catalogues Ltd would be a more fitting name for the company.

PMP Ltd


Given this resilience and relevancy we have more confidence in the longer term outlook for

catalogues. We also take the view that print prices in the spot market, being at marginal cash cost,

should not fall much further without significant industry restructuring Accordingly, we have initiated

estimates for FY16e with EBITDA expected to be similar to FY15e at $52m.

After the difficult trading conditions of 2HFY13, which are continuing in 1HFY14, we are taking a more

positive view of recovery potential in 2HFY14 and FY15. We are upgrading our FY14e & FY15e revenue

estimates. Our Print Au revenue estimates are increasing by 4.8% for FY14e and 12.5% in FY15e. Our

revenue model is driven by detailed assumptions for catalogue pages, volumes and prices. We also

model revenues by volume and price for magazines and letter box distribution.

In summary, FY13 was primarily adversely affected by volume declines. FY14 should see the adverse

impact of both the lower volume run rate and price declines. In broad terms these effects should

broadly negate the benefit of Phase 2&3 cost savings.

In the near term, trading remains difficult, especially retail activity as noted by MYR. While there are

some signs of volume recovery in NZ, we have conservatively lowered our FY14e EBITDA estimate by

3% to $60m. Our free cash flow estimate and DCF value have increased -from $0.44 ps to $0.48ps.

Estimate changes Previous

FY14e New FY14e Change % Previous

FY15e New FY15e Change %

Total revenue 883.0 908.0 2.8% 819.0 887.3 8.3%

Print Au Catalogue volumes -2.6% -4.0% -2.6% 2.5%

Print Au Catalogue prices -6.0% -3.0% -3.0% 0.0%

Print Au catalogue printing revenues 254.0 268.4 5.7% 240.0 275.1 14.6%

Magazine volumes -10% -10% -10% -10%

Magazine prices -10% -7% -10% -5%

Print Au magazine sales 44.00 45.61 3.7% 35.20 38.8 10.2%

Distribution Au volume -3.0% -3.0% -3.0% -3.0%

Distribution Au price 0.0% 0.0% 0.0% 0.0%

Distribution Au revenue 82.70 85.45 3.3% 80.20 82.9 3.3%

Print Au revenues 337.2 353.3 4.8% 311.9 351.0 12.5%

PMP NZ revenue 149.8 150.9 0.7% 142.3 146.3 2.8%

EBITDA (pre Sig items) 62.0 60.0 -3.3% 55.0 55.0 0.0%

NPAT (pre Sig items) 16.3 12.2 -25.2% 16.9 14.6 -13.6%

EPS (pre Sig items) 5.1 3.8 -25.5% 5.2 4.5 -13.5%

Sig items pre tax 0.0 -17.0 0.0 0.0

NPAT (post Sig items) 16.3 0.3 16.9 14.6

EPS (post Sig items) 5.1 0.1 5.2 4.5

Dividend per share 0.0 0.0 0.0 2.3

Maintenance capex -10.0 -6.0 -10.0 -6.0

Free cash flow 35.1 19.4 32.5 38.3

Net debt 54.7 72.6 29.1% 23.2 40.9

ROE % (nomalised NPAT) 5.4% 4.7% 5.3% 5.3%

Valuation DCF ($) 0.44 0.48 9.1%

PMP Ltd


In estimating EBITDA for FY14e we include $25m of Phase two cost savings, and being implemented

half way through this year, a further $8m of the $17m of Phase 3 cost savings. We include the full

$17m cash restructuring charge in our FY14 estimates.

On a like for like basis our $60m FY14 EBITDA estimate would represent a fall of $8.7m of FY13s rent

adjusted EBITDA. Following the sale and lease back of the four operating properties, we include an

extra $5.5m of rent in FY14e (excluding the $2m rent charged in FY13 and the full $7.5m in FY14).

EBITDA bridge FY14 delta Notes FY13 EBITDA pre Sig items 72.2

Phase two additional cost savings 25.0

$37.1m Phase 2 total savings, $13m in FY13, extra $25m (full benefit) in FY14

Phase three additional cost savings 8.0 Phase 3 expected to deliver $17m of annualised cost savings, $8m in FY14 due to midyear start

Total positive 33.0 Rent -5.5 10% rent on $75m property sale and lease back, $2m cost in FY13

Loss of PMM contribution -1.5 Full year loss of EBITDA contribution

Labour -10.4 4% EBA on $260m of labour costs pre Sig items Volume effect -17.8 Continued weak 2HFY13 run rate into FY14 Price effect -10.0 Industry overcapacity, price concessions to lock in contracts

Total negatives -45.2

FY14 EBITDA estimate 60.0 11.7% reduction on pcp excluding additional rent/ like for like reduction ($74.2m v $65.5m)

Note: Interest saving on lower debt 4.6 $54.2m debt reduction in FY13, 8.5% cost of debt

Borrowing costs on extra working capital -0.49 $5.8m working capital increase in FY14e as provisions unwind and Gotch declines( less offset)

We see significant scope for improved shareholder returns at PMP. Free cash flow, a key performance metric, should be used for further debt reduction. Maintenance capex is around $6m pa versus D&A at $34m last year. No new presses are required (c. 65% capacity utilisation). The new Manroland press has a theoretical capacity to handle around 20% of PMPs volumes given the size and high speed at which it will operate. We estimate $95m ($0.29 ps) of free cash flow can be generated over the next three years, causing net debt to fall to $12.7m by FY16. For the first time in our coverage, we now expect PMP to return to making dividend distributions albeit in FY15e. We assume a 50% payout ratio for FY15e & FY16e. We estimate (unfranked) dividends of 2.3cps and 2.9 cps respectively. These dividends generate yields of 6.7% next year and 8.8% the year after. We value PMP on a DCF, EV/EBITDA and FCF yield basis given the significant deleveraging and free cash flow. On conservative assumptions, our DCF model generates fair value at $0.48 ps. PMP trades at 3.0x FY14e EV/EBITDA. The Small Cap Industrials Index trades at c. 8.2x for FY14e. The combination of delivering on market expectations, financial deleveraging and the emergence of a sustainable and profitable market leading integrated catalogues business deserve a higher multiple. A more reasonable 5x multiple (40% discount to market) generates a $0.70 ps target. PMP is trading at a 10.7% free cash flow yield for FY14e followed by 25.7% in FY15e. Investors are being excessively compensated for a declining risk profile. A more appropriate 15% FY15e free cash flow yield generates a $0.66c per share fair value.

PMP Ltd


Perhaps we shouldnt be surprised by PMPs transformation strategy and the expected improvement in shareholder returns. To some extent we see deleveraging parallels locally and offshore. HIL, RHG and CSV have followed similar routes with som success. In the US, PMPs strategy is not dissimilar to what print, digital and communications business RR Donnelley (Nasdaq:RRD) has recently done. While more diversified than PMP (outsourcing, legal support, document management etc), RRD engaged on a similar path of cost reduction and balance sheet strengthening. The stock price has risen by 73% from a low of $9.39ps on the 12

th January 2013.

Company highlights Financial history FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Total Revenue 1214.0 1333.6 1245.0 1288.1 1347.3 1345.6 1212.0 1194.3 1093.9 975.8

EBITDA pre Sig items 113.6 110 115.8 128.3 125.9 96.7 92.8 100.1 76.5 72.2

EBITDA Margin % 9.4% 8.2% 9.3% 9.8% 9.3% 7.1% 7.6% 8.3% 7.0% 7.2%

EBIT pre Significant items 74.7 76.7 82 91.3 84.7 54.9 52.2 56.7 32.7 34.4

EBIT Margin pre Sig items% 6.2% 5.8% 6.6% 7.0% 6.2% 4.0% 4.3% 4.7% 3.0% 3.4%

Pre-tax profit pre Sig items

26.4 36.9 -9.9 -26.1 20.9

Net Profit pre Sig items

33.6 48.6 52.3 18.8 24.5 28.7 8.8 14.8

Net (loss)/ profit

0 46.4 78.9 -26.6 20.6 -11.3 -24.5 -69.7

Basic EPS cps 6.00 10.7 11.2 15.5 23.9 -7.9 6.2 -3.4 -7.5 -21.5

Normalised EPS cps 15.93 5.72 7.46 8.56 2.7 4.6

PMP is the leading, nationwide, vertically integrated print and distribution business in Australia &

New Zealand.

The group primarily prints catalogues for retailers, magazines for publishers, read for pleasure soft back books (Griffin Press) and directories for Sensis. PMP also has an adjacency magazine distribution business (Gordon & Gotch). Catalogues (design, printing and distribution) account for around 80% of group sales (excluding Gordon & Gotch). Logistically PMP:

Operates 15 printing presses (down from 21) at four sites in Australia and 3 (from 7) sites in NZ ($234m of PP&E). The company has recently spent $28m acquiring a new Manroland press for the Clayton plant.

Had 1587 FTEs at at 30th

June 2013, almost half of the 3250 employed in FY06.

Converted 239,000 tonnes of paper in FY13, delivered 2.91bn copies to letterboxes and distributed 159m gross copies of magazines.

Is the leader in the Australian heatset printing market (37% share), followed by privately owned Hannan Group (33%), Franklins (13% mainly catalogues) AIW (7%) and Webstar 4%.

Has 35% share of the duopoly in letter box distribution market in Australia (Salmat leads with 65% share).

PMP Digital has 8% share operating in a more fragmented pre-press industry structure with agencies being the largest group (36% share). Wellcom is the single largest player at 18%.

Has the largest share of the NZ heatset market with 65%. Following the closure of Geon, Webster has 31% share.

PMP Ltd


Revenue analysis In developing a revenue model and then financial estimates for PMP, we first analyse volume and

price trends across the main businesses. PMP operates in a broad range of markets, some of which

have both cyclical and structural challenges, others being better placed for profitable growth. We list

the main business units below.

PMP has consolidated reporting for its Au digital, print and distribution operations in to PMP Australia.

We estimate the contribution of each unit to back solve for price trends.

Despite weaker trading conditions 2HFY13 sales for the group performed better

versus pcp that 1HFY13 (-10.3% vs -11.2%)

The best performance was in Letterbox distribution where we estimate sales

increased by 4.3% in 2HFY13 vs pcp (1HFY13 -5.3% vs pcp)

We estimate Print Au revenues fell by -13.8% in H2 FY13 driven in part by

deterioration in directories sales (now closed). (-15.0% in 1HFY13 vs pcp)

The integrated NZ operations saw revenues fall by -7.8% vs pcp in 1HFY13 with a

reduced decline of -6.8% in 2HFY13 vs pcp.

Segment revenue FY09 FY10 FY11 1H FY12 2H FY12 FY12 1H FY13 2H FY13 FY13 Print Australia 568.5 492.1 472.4 239.3 210.0 449.3 203.5 181.1 384.6

Change % -1.8% -13.4% -4.0% -4.9% -15.0% -13.8% -14.4%

Distribution Australia 105.7 84.5 90.9 49.2 38.7 87.9 46.6 Change % -3.5% -20.1% 7.5% -3.2% -5.3% 4.3% -1.1%

PMP Digital 33.9 31.1 28.6 14.2 12.6 26.8 12.8

PMP Australia 708.1 607.7 591.8 302.7 261.3 564.0 262.9 230.7 493.6

Change vs pcp

-14.2% -2.6%

-4.7% -13.1% -11.7% -12.5%

Gordon & Gotch Australia 428.4 408.9 413.4 185.5 173.0 358.5 167.5 155.9 323.4

PMP NZ 209.1 195.5 189.1 89.4 82.0 171.4 82.4 76.4 158.8

Change % -9.4% -7.8% -6.8% -7.3%

Total 1345.6 1212.0 1194.2 577.6 516.2 1093.8 512.7 463.0 975.7

Change vs pcp

-9.9% -1.5%

-8.4% -11.2% -10.3% -10.8%

PMP reports production numbers i.e. number of tonnes converted, the number of units delivered to

letter boxes and the number of gross copies of magazines delivered. Although the tonnes of print can

be distorted by shifts to lighter weight cheaper paper grades, we take these numbers as a proxy for

volumes.

PMP Ltd


Volume trends FY08 FY09 FY10 FY11 1H 12 2H 12 FY12 1H 13 2H 13 FY13 Print Business

Converted tonnes (000s) Print AU 303 302 260.7 253.5 122 106.2 228.2 102 96.8 198.8

Change % -10% -16% -9% -13%

Print NZ 52 49.2 44.5 47.5 24 20.4 44.4 22 18.3 40.3

Change % -7% -8% -10% -9%

Print total 355 351.2 305.2 301 146 126.6 272.6 124 115.1 239.1

Change % vs pcp

-1% -13% -1%

-9% -15% -9% -12%

Letterbox distribution Units delivered - No of

copies (m) Distribution Au 2899 2827 2271 2450.5 1332 1032.9 2364.9 1255 1053.8 2308.8

Change % -3% -6% 2% -2%

Distribution NZ 588 592 569 636 307 283.4 590.4 308 294.3 602.3

Change % -7% 0% 4% 2%

Distribution total 3487 3419 2840 3086.5 1639 1316.3 2955.3 1563 1348.1 2911.1

Change % vs pcp

-2% -17% 9%

-4% -5% 2% -1%

Magazines business Gross copies distributed (m) Gordon & Goth Au 174.8 170.6 171.7 172.1 80 75.2 155.2 71 67.3 138.3

Gordon & Gotch NZ 45.9 44.5 42.9 40.2 13 12.8 25.8 11 10.2 21.2

Total 220.7 215.1 214.6 212.3 93 88 181 82 77.5 159.5

Change % vs pcp

-3% 0% -1%

-15% -12% -12% -12%

Once again we see that despite weaker trading conditions, 2HFY13 volumes in Print Au fell

less vs pcp than in the first half of the year (-9% vs -16%).

Distribution volumes increased by 2% vs pcp in 2H FY13 both in Australia compared to a 6%

decline in 1HFY13 vs pcp

This resilient second half performance underpins our more confident outlook.

By subtracting volume changes from the revenue changes we can back solve for prices.

Implied price changes FY06 FY07 FY08 FY09 FY10 FY11 FY12 1H 13 2H 13e FY13e Print Australia revenue 681.4 675.2 579.2 568.5 492.1 472.4 449.3 203.5 181.1 384.6

Change vs pcp

-0.9% -14.2% -1.8% -13.4% -4.0% -4.9% -15.0% -13.8% -14.4%

Volume change %

-0.3% -13.7% -2.8% -10.0% -16.4% -8.9% -12.9%

Estimated price change %

-1.5% 0.2% -1.2% 5.1% 1.4% -4.9% -1.5%

Au Letterbox distribution 119.9 131.9 109.5 105.7 84.5 90.854 87.944 46.6 40.4 87

Change vs pcp

10.0% -17.0% -3.5% -20.1% 7.5% -3.2% -5.3% 4.3% -1.1%

Volume change %

-2.5% -19.7% 7.9% -3.5% -5.8% 2.0% -2.4%

Estimated price change %

-1.0% -0.4% -0.4% 0.3% 0.5% 2.3% 1.3%

We estimate Au print prices fell by -4.9% in 2H FY13 vs pcp. Industry overcapacity (c65%

utilization) caused prices to fall to marginal cash cost. Competition from PMPs privately

owned rivals was intense.

PMP Ltd


Distribution prices however, increased both in the first and second halves (+0.5% & +2.3%).

Given the duopolistic market structure with SLM, we see significant scope for margin growth

(recovery) in PMPs Australian letterbox distribution business.

Given improved volumes and rising prices in letterbox distribution, and that scale is an

effective barrier to entry to new competition, we estimate EBIT margins in this business could

rise to 6-8% (peak 8.6% in FY06, -1.9% in 2HFY12 ).

Having identified price trends the next stage in our analysis is to estimate future volumes and

prices for each of PMPs major products. These estimates drive our group revenue

assumptions. The table above shows our detailed revenue estimates by product.

Revenue estimates by product Catalogues Revenue FY11 FY12 FY13 Ch % FY14e Ch % FY15e Ch % FY16e Ch %

Volumes no. of copies (bn) 2.5 2.41 -2.0% 2.39 -1.0% 2.45 2.5% 2.51 2.5%

Pagination (pages) 22.0 21.8 -1.0% 21.1 -3.0% 21.1 0.0% 21.1 0.0%

Volumes (total pages printed) 54.1 52.5 -3.0% 50.4 -4.0% 51.7 2.5% 53.0 2.5%

Price per '000 pages 5.5 5.5 -1.0% 5.3 -3.0% 5.3 0.0% 5.3 0.0%

Sales 293.3 300.0 288.1 -4.0% 268.4 -6.9% 275.1 2.5% 282.0 2.5%

Magazines revenue

Volume change % -8.1% -10.0% -10.0% -10.0%

Price % -10.0% -7.0% -5.0% -5.0%

Sales 88.2 67.1 55.0 -18.1% 45.6 -17.0% 38.8 -15.0% 33.0 -15.0%

Books 40.6 39.6 38.0 -4.0% 36.1 -5.0% 34.3 -5.0% 32.6 -5.0%

Newspapers 5.6 4.2 3.5 -16.7% 3.2 -10.0% 2.8 -10.0% 2.6 -10.0%

Print Au Total 472.4 449.3 384.6 -14.4% 353.3 -8.1% 351.0 -0.6% 350.1 -0.3%

Distribution Australia

Revenues 90.9 87.9 88.1 0.2% 85.4 -3.0% 82.9 -3.0% 80.4 -3.0%

No of units delivered (m) 2450.5 2364.9 2308.8 -5.0% 2239.5 -3.0% 2172.3 -3.0% 2107.2 -3.0%

Average price ($ per thousand) 37.1 37.2 38.2 2.0% 38.2 0.0% 38.2 0.0% 38.2 0.0%

Digital 28.6 26.8 22.0 -10.0% 20.9 -5.0% 21.5 3.0% 22.2 3.0%

PMP Au 591.8 564.0 493.6 -12.5% 459.6 -6.9% 455.4 -0.9% 452.7 -0.6%

G&G Au 413.4 358.5 323.4 -9.8% 297.6 -8.0% 279.7 -6.0% 268.5 -4.0%

PMP NZ 189.1 171.4 158.8 -7.3% 150.9 -5.0% 146.3 -3.0% 141.9 -3.0%

Total 1194.3 1093.9 975.8 -10.8% 908.0 -6.9% 881.5 -2.9% 863.1 -2.1%

Our estimates for FY15e Australian catalogue volumes have turned positive. We now expect the

market to grow by 2.5%. This compares to the 5 year average annual growth rate since 2008 of +2.1%.

We estimate some cyclical recovery in marketing spend in 2HFY14e and FY15e. We see benefits from

market innovations such as integrated campaigns with on line media where catalogues are being used

by both traditional retailers and etailers. We also see positives from versioning as has happened in

European markets, where more localized catalogue editions are designed and printed for area specific

campaigns.

PMP Ltd


We expect catalogue pagination to remain static at an average of 21 pages per copy. There are

offsetting factors. Some catalogues are used to drive traffic to websites (slimmer versions) whereas

traditional retailers type catalogues should enjoy should some cyclical recovery in page count.

The net result is we expect PMPs sales to effectively stabilize at around $890 - $870m in FY15e &

FY16e once the effects of FY14s discontinued business (directories), lower prices and volumes have

run through.

As our numbers testify, we do not believe PMP is in terminal decline.

The issues as revenues become more predictable and stable, and hence the next step in our analysis,

moves to setting the right cost structure.

Costs down

Cost structure FY07 FY08 FY09 FY10 FY11 FY12 1H FY13 2H FY13 FY13 Change v pcp %

Raw materials & consumables used -299.6 -342.3 -358.2 -294.2 -269.3 -272.5 -128.0 -111.3 -239.2 -12.2%

% of Print Au Revs

-59.1% -63.0% -59.8% -57.0% -60.7% -62.9% -61.5% -62.2%

Cost of finished goods sold -362.8 -387.9 -408.5 -396.5 -404.0 -341.9 -159.9 -149.2 -309.1 -9.6%

COGS 953.8 1038.3 1040.7 931.6 938.3 864.5 -287.9 -260.5 -548.4

Employee costs -357.1 -359.8 -369.5 -308.7 -317.6 -301.2 -158.6 -139.1 -297.7 -1.2%

% Revenue 27.4% 26.5% 27.2% 25.3% 26.3% 27.4% 30.2% 28.7% 29.5%

Outside production services -38.3 -51.6 -40.4 -30.7 -27.0 -26.1 -12.6 -10.7 -23.3 -10.7%

% Revenue 2.9% 3.8% 3.0% 2.5% 2.2% 2.4% 2.4% 2.2% 2.3%

Freight -27.0 -26.6 -35.8 -28.3 -29.8 -26.3 -11.5 -10.9 -22.3 -15.1%

% Revenue 2.1% 2.0% 2.6% 2.3% 2.5% 2.4% 2.2% 2.2% 2.2%

Repairs & maintenance -23.1 -20.9 -19.1 -23.5 -17.4 -20.6 -7.9 -8.4 -16.3 -20.8%

% Revenue 1.8% 1.5% 1.4% 1.9% 1.4% 1.9% 1.5% 1.7% 1.6%

Occupancy costs -22.6 -21.8 -23.7 -22.5 -22.6 -18.1 -8.0 -18.1 -26.2 44.2%

% Revenue 1.7% 1.6% 1.7% 1.8% 1.9% 1.6% 1.5% 3.8% 2.6%

Other expenses -36.8 -39.2 -69.3 -29.5 -70.3 -59.4 -13.1 -78.2 -91.3 53.6%

% Revenue 2.8% 2.9% 5.1% 2.4% 5.8% 5.4% 2.5% 16.2% 9.0%

Total Operating Costs -504.8 -519.8 -557.8 -443.3 -484.8 -451.7 -211.7 -265.3 -477.0 5.6%

Total Operating Costs/ Rev 39% 38% 41% 36% 40% 41% 40% 55% 47.3%

We estimate PMP has reduced annualized costs by around $62m in New Zealand and in the Phase

1and 2 Transformation in Australia. A further $17m of costs are slated to be taken out in Phase Three

commencing later in 1HFY14. Of the $37.1m Phase 2 costs reductions, $13.1m fell through to profit in

FY13, mainly in the second half.

Labour costs account for around 30% of group revenues. The $$297.7m of labour costs included in the

FY13 income statement include $37m of significant items. The underling labour cost base is around

$260m. In modeling future labour costs we assume under the industry EBA (2 years to run) costs

increase at 4% p.a.

PMP Ltd


Headcount FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Employees FT 3438 3240 3250 3074 3010 2762 2678 2622 2159 1587

PMP Au

911

Gordon & Gotch Au

133

NZ

486

Corporate

57

Other components of the cost structure have been relatively stable. Freight accounts for around 2% of

group revenues, outside production services account for around 2.4%.

Occupancy costs are due to increase though, by an extra $5.5m in FY14e vs pcp, due to the 10% rent

agreement on the sale and lease back of the four properties.

Asset sales Status Cash received Proceeds ($m) Wacol sold Jan 13 8.3

PMM sold Jan-13 5

Other assets sold Jan-13 4.6

Moorebank sold Mar-13 30.2

Clayton sold Q4FY13 20

Bibra Lake (e) sold Q4 FY13 6.7

Total 74.8

Significant items In effecting these Transformations PMP incurred $88.5m of pre tax significant charges in FY13. $65.9m

of intangibles and goodwill were impaired in Print Au. There is no further goodwill in this Cash

Generating unit.

Significant items FY12 1H FY13 2H FY13 FY13 Redundancies & other -11.81 -11.70 -18.30 -31.96

Directories Chullora closure costs

-11.60

-18.11

Gain on sale of business 0.20 5.89

5.89

Gain on sale of fixed assets

4.10

21.37

Finance cost of swap unwind

0.18

Impairment of plant, equipment and intangibles and goodwill -29.49

-65.86

Total Sig Items (pre-tax) -41.09

-88.50

Tax on Sig items -7.83

-4.01

Total Net cash significant item -70.6

-24.1

Total Non-cash significant items -29.5 -41.4 -64.4

Total Sig items -41.1 -41.4 -41.2 -88.5

PMP Ltd


Significant income & expenses 2011 2012 2013 Loss on closure of Scribo excluding fixed asset write downs 4.4

Loss on closure of Scribo - fixed asset write downs 1.8 Written down of Scribo goodwill, intangibles, plant & equipment 19.2 Gain on sale of land & buildings -2.4

-21.0

Gain on sale of fixed assets and business

-0.2 -6.2

Restructuring & one off costs 16.0 11.8 32.0

Write down of plant, equipment, intangibles & goodwill as per restructurings 5.5 28.3 65.9

Write down on plant and equipment held for sale to fair value 7.6 1.2 Directories closure costs

18.1

Finance cost swap unwind

-0.2

Total significant items (as per profit & loss) 52.2 41.1 88.5

Tax benefit 12.2 7.8 4.0

Total Significant items post tax 40.0 33.3 84.5

Sig items costs recorded in other income, COGS, employee expenses, occupancy costs & other expenses

The table below identifies the components of the significant items by half year as charged to the

Income statement. The costs are broken down across several line items.

Significant Items 1H FY12 1H FY13 2H FY13 FY13 Other revenue

9.95 17.30 27.25

Cost of finished goods sold -0.33

0.00 0.00

Employee expenses -2.46 -22.27 -14.89 -37.16

Freight

0.15

0.00 0.00

Occupancy costs -0.39

-7.98 -7.98

Other expenses -2.06 -29.07 -41.54 -70.61

Total

-5.08 -41.39 -47.12 -88.50

In building our estimates for FY14e FY16e, we normalize for these FY13 charges to find the underlying level. We calculate the base revenue line for FY13 at $975m and the underlying costs at $961m. In FY14 we assume a dollar for dollar first year payback on the $17m Phase 3 Transformation spend. Given the timing of the plans, we assume $8m of savings this year.

Normalised Income Statement - excluding Significant items 2012 2013 Revenue 1093.9 975.8

Other revenue 7.6 5.9

Total Revenue 1101.5 981.7

COGS -341.9 -309.1

Employee costs -292.1 -260.5

Freight -26.1 -22.3

Repairs & maintenance -21.7 -16.1

Occupancy costs -18.2 -18.2

Other expenses -28.3 -20.7

Finance Costs -17.8 -13.4

Therefore base revenue line is $975.8m

Base cost line is $960.99m.

PMP Ltd


Using these bases, we estimate each of the major cost items for FY14e, FY15e and FY16e. We assume ongoing productivity improvements and further reductions in employee costs. Overall we assume total operating costs , as a percentage of revenue, fall from 47% in FY13e to under 40% in FY16e

Cost estimates FY13 FY14e Change % FY15e Change % FY16e Change %

Raw materials & consumables used -239.2 -214.9 -10.2% -200.3 -6.8% -196.2 -2.1%

% of Print Au Revs -62.2% -60.8% -57.1% -56.0%

Cost of finished goods sold -309.1 -278.2 -10.0% -271.9 -2.3% -268.0 -1.4%

COGS -548.4 -493.10 -472.16 -464.16

Employee costs -297.7 -264.1 -11.3% -254.8 -3.5% -247.1

% Revenue 29.5% 29.1% 28.7% 27.8%

Outside production services -23.3 -21 -9.8% -20 -4.8% -19

% Revenue 2.3% 2.3% 2.3% 2.1%

Freight -22.3 -20 -10.3% -18 -10.0% -18

% Revenue 2.2% 2.2% 2.0% 2.0%

Repairs & maintenance -16.3 -15 -8.0% -15 0.0% -15

% Revenue 1.6% 1.7% 1.7% 1.7%

Occupancy costs -26.2 -31.15 19.1% -32.40 4.0% -33.69

% Revenue 2.6% 3.4% 3.7% 3.8%

Other expenses -91.3 -20.7 -77.3% -20 -3.4% -20

% Revenue 9.0% 2.3% 2.3% 2.3%

Total Operating Costs -477.0 -371.95 -22.0% -360.20 -3.2% -352.79

Total Operating Costs/ Revenue 47.3% 41.0% 40.6% 39.8%

Profit and margin trends The next step in our process is to analyse profit and margin trends by segment and business unit.

Given the diverse nature of the group we need to know where the profit is made and which businesses

have the greatest earnings power.

While NZ profits have recovered, and now even slightly exceed FY09s level, Print Australia is PMPs

dominant business accounting for around 70% of EBITDA pre corporate costs.

EBITDA pre Sig items FY09 FY10 FY11 FY12 1HFY13 2H FY13 FY13 Print Australia 61.8 76.9 87.6 72.0 28.6 25.9 54.5

Distribution Australia 7.8 -0.1 1.7 1.9 2.5 1.0 3.5

PMP Digital 6.4 4.9 2.2 1.5 1.6 0.4 2

PMP Australia 76.1 81.7 91.5 75.4 32.6 27.37 59.96

Gordon & Gotch Australia 14.6 9.4 4.9 1.5 0.3 1.09 1.35

PMP NZ 15.7 12.1 11.0 8.2 8.3 8.59 16.90

Corporate -9.7 -9.0 -7.3 -8.5 -2.1 -3.88 -6.01

Total 96.7 92.8 100.1 76.5 39.0 33.18 72.2

PMP Ltd


EBITDA margins pre Sig items FY09 FY10 FY11 FY12 1HFY13 2H FY13 FY13 Print Australia 10.9% 15.6% 18.5% 16.0% 14.1% 14.3% 13.4%

Distribution Australia 7.3% -0.2% 1.9% 2.1% 5.3% 2.5% 4.0%

PMP Digital 18.5% 15.5% 7.6% 5.4% 12.5% 4.4% 9.1%

PMP Australia 10.7% 13.4% 15.4% 13.3% 12.4% 10.9% 11.6%

Gordon & Gotch Australia 3.4% 2.3% 1.2% 0.4% 0.2% 0.7% 0.4%

PMP NZ 7.5% 6.2% 5.7% 4.8% 10.1% 11.2% 10.6%

Total 7.1% 7.6% 8.3% 6.9% 7.1% 7.1% 7.2%

Shaded areas Pegasus estimates

While there has been some margin pressure since the FY11 high watermark, we assume Print Australia

still generates c.14% EBITDA margins. Margins increased slightly in 2HFY13 to 14.3%e.

We estimate Distribution Australia saw some margin improvement in FY13 vs pcp (4% vs 2.1%)

supported by cost savings.

We estimate the second half of the year was tough for the Digital business which clearly needs a larger

customer base.

While we see scope for margin improvement in distribution, and with volume growth digital, we are

concerned about margins in Gordon & Gotch. In our experience non-core businesses can disappoint.

At 0.4% margin there is little comfort.

In analysis and estimating PMPs segment EBIT we need to next assess the groups depreciation

charge. Total depreciation and amortisation was $37.8m in FY13 a very large number for a company

with a market capitalization of $116.6m. While NZ has a high depreciation charge relative to EBIT

($7.2m vs $9.7m in FY13), as we would expect 70% of the charge falls on Print Australia. This is in line

with the profit contribution. We also note that corporate costs have fallen by 28% since FY12.

D & A FY09 FY10 FY11 FY12 1H FY13 2H FY13 FY13 Print Australia -27.563 -29.173 -32.2 -32.6 -14.0 -12.4 -26.4

Distribution Australia -2.953 -0.762 -0.6 -0.6 -0.3 -0.3 -0.6

PMP Digital -1.752 -1.434 -2.1 -2.4 -1.2 -1.2 -2.4

PMP Australia

-35.5 -15.5 -13.8 -29.4

Gordon & Gotch Australia -1.63 -1.871 -1.2 -0.4 -0.1 -0.1 -0.2

PMP NZ -6.731 -6.533 -6.1 -6.6 -3.5 -3.6 -7.2

Corporate -1.143 -0.856 -1.2 -1.2 -0.6 -0.5 -1.1

Total -41.8 -40.7 -43.4 -43.8 -19.7 -18.1 -37.8

Shaded areas Pegasus estimates

EBIT pre Sig items FY09 FY10 FY11 FY12 1HFY13 2H FY13 FY13 Print Australia 34.3 47.7 55.4 39.4 14.6 13.5 28.1

Distribution Australia 4.9 -2.2 1.1 1.4 2.2 0.7 2.9

PMP Digital 4.6 3.5 0.1 -0.9 0.4 -0.8 -0.4

PMP Australia 43.8 49 56.6 39.9 17.2 13.4 30.6

Gordon & Gotch Australia 13 7.5 3.7 1.0 0.2 0.9 1.1

PMP NZ 9 5.5 4.8 1.6 4.8 4.9 9.7

Corporate -10.9 -9.8 -8.5 -9.8 -2.7 -4.4 -7.1

Total 54.9 52.2 56.7 32.7 19.5 14.9 34.4

PMP Ltd


EBIT Margins pre sig items % FY09 FY10 FY11 FY12 1HFY13 2H FY13 FY13 Print Australia 6.0% 9.7% 11.7% 8.8% 7.2% 7.4% 7.3%

Distribution Australia 4.6% -2.6% 1.2% 1.5% 4.7% 1.8% 3.4%

PMP Digital 13.6% 11.3% 0.5% -3.4% 3.1% -8.7% -1.8%

PMP Australia 6.2% 8.1% 9.6% 7.1% 6.5% 5.8% 6.2%

Gordon & Gotch Australia 3.0% 1.8% 0.9% 0.3% 0.1% 0.6% 0.4%

PMP NZ 4.3% 2.8% 2.6% 0.9% 5.8% 6.4% 6.1%

Total 4.1% 4.3% 4.7% 3.0% 3.8% 3.2% 3.5%

So working through the revenue trends, costs and segment contribution, we can estimate the positive

and negative factors driving the expected change in EBITDA and NPAT from FY13 to FY14e. The table

below shows our EBITDA bridge. For completeness we also include the interest saving as debt falls and

the slight increase in borrowing costs on the extra working capital.

EBITDA bridge FY14 delta Notes FY13 EBITDA pre Sig items 72.20

Phase two additional cost savings 25.00 $37.1m Phase 2 total savings, $13m in FY13, remaining $25m in FY14

Phase two additional cost savings 8.00 Phase 3 expected to deliver $17m of annualised cost savings, $8m in FY14 due to midyear start

Total positive 33.00 PMM contribution -1.50 Business sold in FY13

Rent -5.50 10% rent on $75m property sale and lease back, $2m cost in FY13 PMM Contribution

Labour -10.40 4% EBA on $260m of labour costs pre Sig items Volume effect -17.80 Continued weak 2HFY13 run rate into FY14 Price effect -10.00 Industry overcapacity, price concessions to lock in contracts

Total negatives -45.20

FY14 EBITDA estimate 60.0 11.7% reduction on pcp excluding additional rent/ like for like reduction ($74.2m v $65.5m)

Note: Interest saving on lower debt 4.60 $54.2m debt reduction in FY13, 8.5% cost of debt

Borrowing costs on extra working capital -0.49 $5.8m working capital increase as provisions unwind and Gotch declines( less offset)

In summary, we expect EBITDA to decline from $72.2m in FY13 to $60m this year followed by $55m

next year. Our estimates are conservative and are based on the current market structure, with

overcapacity and price competition prevailing.

Given the decline in depreciation, our EBIT estimates show a trend of increasing profitability from

FY14e to FY16e.

Margin trends FY13 FY14e FY15e FY16e EBITDA pre Significant items 72.2 60.0 55.0 52.0

EBITDA Margin % 7.2% 6.2% 6.2% 6.0%

Depreciation 37.0 33.2 27.0 22.0

Amortisation 0.8 0.8 0.8 0.8

D+A 37.8 34.0 27.8 22.8

EBIT 34.4 26.0 27.2 29.2

EBIT Margin pre Sig items% 3.4% 2.9% 3.1% 3.3%

PMP Ltd


Finance costs

Finance costs and profitability FY07 FY08 FY09 FY10 FY11 FY12 1H 13 2H 13 FY13 Interest payable

18.9 17.6 15.0 15.8 7.7 7.4 15.1

Swaps

9.6 2.3 0.5 2.0

1.4

Interest receivable

0.5 0.4 0.5 -0.3 0.1 -0.4 -0.3

Net interest 24.3 18.8 28.5 14.9 13.9 17.4 7.7 5.7 13.4

Pre-tax profit pre Sig items

26.4 36.9 -10.0 -26.1 11.8 9.1 20.9

Tax -18.9 -13.5 -7.6 -12.4 -13.5 -6.2 -3.7 -2.4 -6.1

Net Profit pre Sig items 48.6 52.3 18.8 24.5 28.7 8.8 8.1 6.7 14.8

Sig items pre tax -2.2 26.6 -65.2 -5.5 -52.2 -41.1 -41.4 -47.1 -88.5

Tax benefit (on significant items) 2.7 48.7 19.8 1.6 12.2 7.8 9.3 -5.3 4.0

Significant items post tax -4.9 75.3

-40.0 -33.3 -32.1 -52.4 -84.5

Net (loss)/ profit 46.4 78.9 -26.6 20.6 -11.3 -24.5 -24.0 -45.7 -69.7

Other post tax comp expense

-1.4 -1.5

7.1

Total comp profit (loss) for the year

-12.7 -26.0 -22.1 -40.6 -62.6

Basic EPS cps 15.5 23.9 -7.9 6.2 -3.4 -7.5 -7.4 -14.1 -21.5

Diluted EPS 15.3 23.9 -7.9 6.1 -3.4 -7.5 -7.4 -14.1 -21.5

Normalised EPS cps

15.9 5.7 7.5 8.6 2.7 2.5 2.1 4.6

DPS cps

4.5 3 1 1 1

Franking

60%

Average No. of Shares on issue 299.7 328.4 337.9 335.3 334.4 327.0 323.8

323.8

Given the strong cash flow and debt reduction though, we also model a fall in the groups net interest

costs in FY14e and beyond. We assume 8.5% cost of debt funds. Debt is effectively eliminated over the

next three years. We assume PMP pays facility fees and charges on top of the spread. These costs are

amortised over three years in the cash flow. PMP has significant tax loses that should last four to five

years in New Zealand and around seven years in Australia. Cash taxes are set at 21% of the notional

standard rate under an agreement with the ATO. We also assume PMP returns to paying dividends, all

be it in FY15e. We suggest a prudent approach at 50% payout ratio. PMP does not have franking

credits so distributions would be unfranked.

Finance costs and profitability estimates FY13 FY14e FY15e FY16e

Interest payable 15.1 8.4 6.1 1.9

Swaps 1.4

Interest receivable -0.3

Net interest 13.4 8.4 6.1 1.9

Pre tax profit pre Significant items 20.9 19.6 24.1 30.3

Tax -6.1 -5.9 -7.2 -9.1

Net Profit pre Significant items 14.8 13.7 16.9 21.2

Significant items pre tax -88.5 -17

Income tax benefit (on significant items) 4.0 5.1

Significant items post tax -84.5 -11.9

Net (loss)/ profit -69.7 1.8 16.9 21.2

Other post tax comprehensive expense 7.1

Total comprehensive profit (loss) for the year -62.6 1.8 16.9 21.2

Basic EPS cps -21.5 0.55 5.21 6.55

Diluted EPS -21.5 0.55 5.21 6.55

Normalised EPS cps 4.6 4.23 5.21 6.55

DPS cps 2.6 3.3

PMP Ltd


Valuation With these revenue and margin trends, significant deleveraging and rising normalized EPS from FY14e,

how should we value PMP?

We take 3 approaches to build a composite view.

Our first approach is DCF. We use our three year estimates and assume 0% growth in perpetuity from

the initial three year period. PMP has 323.8m shares on issue. We calculate PMP has a WACC of 11.1%

using a 15% debt/ equity capital structure, although we would prefer to see PMP completely debt free

(operating risk is enough!)

The DCF model generates fair value at $0.48 ps.

DCF valuation FY14e FY15e FY16e Net Income 12.24 14.60 19.03

Non-Cash Items 34.00 27.80 22.80

Changes in Working Capital -6.81 -2.21 -2.30

Interest Payments Add back Net of tax -5.95 -4.43 -1.43

Capital Investments -23.68 -6.00 -6.00

Free Cash Flow to Firm 9.80 29.76 32.10

Discount Factors 0.90 0.81 0.73

Present Value 8.82 24.12 23.41

3 yr Cumulative NPV 56.35

Terminal Value 289.40

Present Value of Terminal Value 171.03

Terminal Growth Rate 0.00%

Metrics Value

Market Capitalisation

108.5

Target Debt/Equity 15.0%

Risk Free Rate 5.0%

Equity Risk Premium 5.0%

Levered Beta 1.400

Cost of Equity 12.0%

Cost of Debt 8.5%

Tax Rate 30.0%

After Tax Cost of Debt 6.0%

WACC 11.1%

Present Value of 3 Year Cash flows 56.35

Present Value of Terminal Value 171.03

Present Value of Free Cash flows 227.38

Minus FY14e net debt 72.61

Other Adjustments 0.00

Fair Value ($m) 154.77

Fair Value Per Share 0.48 Upside/ (downside) 43%

Implied Normalised PE (FY14e) 12.65

Enterprise Value

Value Attribution

181.1

% of Value in 3 Year Cash Flows 24.8%

% of Value in Perpetual Value 75.2%

PMP Ltd


We benchmark this return versus the Small Cap industrials Index for FY14e. PMP trades at 3.0x FY14e

EV/EBITDA. The Small Cap Industrials Index trades at c. 8.2x for FY14e. The combination of delivering

on market expectations, financial deleveraging and the emergence of a sustainable and more

profitable market leading integrated catalogues business deserve a higher multiple. A more

reasonable 5x multiple (40% discount to market) generates a $0.70 target.

Third, PMP is trading at a 10.7% free cash flow yield for FY14e followed by 25.7% in FY15e. Investors are being excessively compensated for a declining risk profile. A more appropriate 15% FY15e free cash flow yield generates a $0.66c per share fair value.

Risks Our investment case for PMP has three significant risks.

The first risk, which is not uncommon in such large scale restructurings, is that in reducing costs so

significantly, the company effectively breaks. Critical people are lost, morale is damaged, the

companys reputation suffers and customers go away.

The second risk is that even if the transformation is managed well and is effective in stabilizing PMPs

business and level of profitability, the stability is temporary. The market could continue to deteriorate.

Structural pressures could continue and revenues could fall further. In substance, the sustainable and

more profitable Integrated Catalogues Ltd business model either does not happen or is in decline

after all.

The third risk is what we might call the X factor risk that is someone or thing changes and the

consequences of their new position are negative for PMP shareholders. This could be a bank, a

competitor, a major customer, a supplier, a forex rate, or someone within PMP. Can the company

withstand shock? Is it resilient while so much change is taking place?

In our opinion all of these risks are relevant. They all warrant attention and ongoing scrutiny. But we

have modeled the business conservatively and would not rule out that if profits take another leg

down, more costs are taken out. We also see that the stock is trading at 2.8x EV/EBITDA. As we have

said above, investors are being excessively compensated for a declining risk profile.

Change in debt FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e Cash at Beginning 4.0 17.1 33.6 29.7 12.1 11.7 21.2 40.6 71.6

plus net change in cash 3.0 16.5 -4.0 -17.1 -0.5 9.0 19.4 31.0 27.4

adjustments 0.0 0.0 0.2 -0.6 0.1 0.5

Cash at End 7.0 33.6 29.7 12.1 11.7 21.2 40.6 71.6 99.0

PMP Ltd


Financial statements Balance sheet FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e Issued Capital 568.9 627.7 626.0 626.0 622.4 356.0 356.0

Minority Interests

Total Capital & Reserves 271.7 395.2 351.7 374.9 355.3 320.7 258.0 258.4 272.9 272.9

ST Payables 182.1 185.5 185.8 170.3 172.4 141.5 138.9 124.4 121.6 119.0

Short Term Debt 59.0 2.1 46.9 25.0 45.2 75.6 32.8 32.8 32.8 32.8

Income tax payable 1.2 1.7 0.1 0.6 2.5 0.1 0.0 0.0 0.0 0.0

Other financial Liabilities 10.5 7.4 0.9 4.0 4.0 1.1 1.1 1.1 1.1

Provisions 31.3 32.4 32.0 29.4 38.8 28.6 25.7 25.7 25.7 25.7

Total Current Liabilities 284.0 221.8 272.2 226.3 262.9 249.9 198.6 184.1 181.2 178.7

Long Term Debt 200.3 204.6 195.0 172.8 107.9 79.9 80.5 80.5 80.5 80.5

Deferred tax liabilities 13.8 17.9 12.1 13.1 5.6 2.2 4.0 4.0 4.0 4.0

Other financial liabilities 4.0 2.6 1.5 4.0 0.6 0.6 0.6 0.6

Provisions 3.4 3.2 3.0 3.2 4.8 4.7 7.4 7.4 7.4 7.4

Pension liabilities 0.0 0.5 0.0 0.0 0.0 0.0

Total Non-Current Liabilities 217.5 225.6 214.1 191.6 119.8 91.3 92.5 92.5 92.5 92.5

Total Liabilities 501.5 447.4 486.3 417.9 382.7 341.0 291.0 276.5 273.7 271.2

Cash 4.1 7.1 33.6 29.7 12.1 12.3 21.2 40.6 71.6 99.1

Inventory 81.7 95.8 88.4 86.3 84.5 77.3 80.7 72.6 71.0 69.5

Receivables 5.6 4.8 140.5 119.4 132.8 106.3 96.2 86.6 84.6 82.8

Financial assets 5.5 7.0 0.6 5.7 5.7 5.7 5.7

Other Current 8.4 8.7 7.9 17.8 8.6 18.6 21.6 24.6

Non-current assets held for sale 8.8 7.9 7.9 1.0 8.0 0 0 0

Total current assets 249.3 265.9 278.7 252.0 237.3 215.2 220.4 224.1 254.5 281.8

PP &E 384.8 403.044 358.5 349.1 334.7 299.0 233.4 206.2 185.2 171.2

Deferred tax assets 34.4 71.604 80.2 69.6 64.3 63.5 62.2 62.2 62.2 62.2

Intangibles 101.4 97.8 118.3 120.1 100.4 82.2 26.5 25.7 24.9 24.1

Other 3.224 4.176 2.3 2.0 1.4 1.8 6.5 6.5 6.5 6.5

Total non-current assets 523.9 576.7 559.3 540.8 500.7 446.5 328.7 300.7 278.9 264.1

Total Assets 773.2 835.5 838.0 792.8 738.1 661.8 549.1 524.8 533.4 545.9

Total Funds and Liabilities 1274.7 1282.9 1324.3 1210.7 1120.8 1002.8 840.1 801.4 807.1 817.1

Net assets 271.7 395.2 351.7 374.9 355.3 320.7 258.0 258.4 272.9 272.9

Gross Borrowings 259.3 206.7 241.9 197.8 153.1 155.5 113.3 113.3 113.3 113.3

Net Debt 255.1 199.6 208.3 168.1 141.0 143.3 92.1 72.7 41.7 14.2

Net debt inc provisions 289.9 235.2 243.2 200.6 184.5 176.6 125.2 105.8 74.8 47.3

Net Debt / Equity % 94% 51% 59% 45% 40% 45% 36% 28% 15% 5% Plus Market Capitalisation 114.9 114.9 114.9 114.9 114.9 114.9 114.9 108.5 108.5 108.5

Enterprise Valuation 370.1 314.6 323.2 283.0 255.9 258.2 207.0 181.2 150.2 122.7

Net debt/EV 68.9% 63.5% 64.4% 59.4% 72.1% 68.4% 60.5% 58.4% 49.8% 38.6%

PMP Ltd


Balance sheet ratios FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e Current Ratio 0.38 0.57 1.16 1.25 1.08 0.98 1.20 1.39 1.61 1.82

Working Capital -154.96 -88.75 4.47 18.48 5.15 -15.82 13.71 20.52 22.73 25.02

Working Capital/Sales -11.9% -6.5% 0.3% 1.51% 0.43% -1.44% 1.36% 2.26% 2.56% 2.88%

Payables/ Revenue % 13.6% 13.7% 13.94% 14.30% 12.86% 13.77% 13.70% 13.70% 13.70%

Receivables/ Revenue % 0.4% 10.4% 9.77% 11.02% 9.66% 9.53% 10% 10% 10%

Inventory / Revenue% 7.0% 6.5% 7.07% 7.01% 7.02% 8.00% 8.0% 8.0% 8.0%

Inventory Turnover 22.87 25.73 23.79 25.80 25.58 25.62 29.20 29.20 29.20 29.20

Days Debtors 36.8 36.8 36.8 33.1 40.21 35.27 34.79 34.79 34.79 34.79

Days Creditors 45.7 45.7 45.7 48.8 52.19 46.93 50.25 50.01 50.01 50.01

Cash change in WCap -66.22 -93.22 -14.01 13.33 20.97 -3.00 -6.81 -2.21 -2.30

Capex/ Sales % 6.8% 1.7% 2.5% 3.3% -2.2% 2.3% 0.7% 0.7% 0.0%

Dep'n/Fixed Assets 9.4% 9.9% 11.3% 11.3% 11.8% 13.5% 15.9% 16.1% 14.6% 12.8%

Gross Debt/Equity Ratio 95% 52% 69% 53% 43% 48% 44% 44% 42% 42%

Net Debt/Equity Ratio 94% 51% 59% 45% 40% 45% 36% 28% 15% 5%

Long Term Debt/Total Debt 77% 99% 81% 87% 70% 51% 71% 71% 71% 71%

Shareholders' Interest 35% 47% 42% 47% 48% 48% 47% 49% 51% 50%

ROSH (normalised NPAT) 17.9% 13.2% 5.3% 6.5% 8.1% 2.7% 5.8% 4.7% 5.3% 7.0%

Ebit/Total T Assets 13.7% 11.6% 8.0% 8.1% 9.1% 5.8% 6.9% 5.7% 6.2% 6.9%

ROE % (Normalised NPAT) 17.9% 13.2% 5.3% 6.5% 8.1% 2.7% 5.8% 4.7% 5.3% 7.0%

EV/EBITDA 2.8 2.4 3.3 3.0 2.5 3.3 2.8 3.0 2.7 2.4

EV/EBITA 3.9 3.6 5.6 5.2 4.1 6.9 5.7 6.8 5.4 4.1

NTA per share($) 0.88 0.70 0.76 0.77 0.74 0.71 0.72 0.77 0.77

NTA Growth -21% 9% 2% -5% -3% 0% 7% 0%

Net Asset Value Backing ps 1.16 1.05 1.12 1.08 0.99 0.80 0.80 0.84 0.84

Price/NAV 0.29 0.32 0.30 0.31 0.34 0.42 0.42 0.40 0.40

Cash flow FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e Cash Flow from Operations

Receipts from customers 1410.3 1503.4 1497.9 1362.6 1313.0 1233.1 1088.1 1017.0 993.8 973.3

Payments to suppliers 1281.4 1398.3 1432.5 1272.9 1225.8 1185.0 1061.5 -977.8 -955.5 -935.7

Dividend/int received 1.0 0.5 0.5 0.4 0.5 0.3 0.3

Interest expense -23.1 -18.3 -19.9 -17.2 -16.5 -14.3 -19.3 -6.8 -5.0 -5.0

Tax Paid -2.3 -3.7 -2.6 1.8 -1.0 -2.8 0.0 -1.3 -1.1 -1.7

Net Operating Cash Flow 104.4 83.7 43.3 74.7 70.2 31.4 7.6 31.1 32.2 30.8

Acquisition -3.2 -21.1 -18.3 -2.1 -2.2

Payments for PP &E -47.3 -90.7 -22.7 -30.5 -33.4 -29.4 -23.7 -6.0 -6.0 -8.0

Proceeds from sale of PP&E 1.2 28.4 1.4 0.5 0.7 5.6 69.6

Payments for licenses & intangibles -0.1 -1.2 -0.7 -0.4 -4.0 -0.2 -0.1 -0.1 -0.1 -0.1

Proceeds from sale of business 35.6

0.3 5.2

Net Cash Flow used in Investing Activities -13.8 -84.6 -40.2 -32.5 -39.0 -23.7 51.0 -6.1 -6.1 -8.1

Equity 1.6 0.1 -0.1

Share Buyback

-1.4 -3.7 -2.7

Debt -91.0 18.0 25.0 -46.2 -41.2 1.0 -49.6

Dividend paid

-14.1 -10.2 -3.4 -6.6 0.0 0.0 -7.3 -9.5

Other -0.3

Net Financing Cash Flow -89.6 3.9 13.4 -46.2 -48.2 -8.2 -49.6 0.0 -7.3 -10.6

Change in Cash Balance 1.0 3.0 16.5 -4.1 -17.1 -0.5 9.0 25.0 18.8 13.2

PMP Ltd


Free cash flow FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e EBITDA 125.9 96.7 92.8 100.1 76.5 72.2 60.0 55.0 52.0

Total Capex 91.8 23.4 30.9 39.7 -23.7 -23.7 -6.0 -6.0 -8.0

Cash tax -3.7 -2.6 1.8 -1.0 -2.8 0.0 -1.3 -1.1 -1.7

Change in Working Capital -66.2 -93.2 -14.0 21.0 -17.6 -3.0 -9.5 -7.4 -3.1

Net Interest -17.8 -19.5 -16.8 -15.9 -14.3 -18.0 -6.8 -2.2 -2.3

Cash Sig item

-10.4 -43.7 -17.0

Total (excludes asset sales) -53.6 -42.0 32.9 64.4 55.1 -16.2 19.4 38.3 36.9

Note we do not include any significant items / restructuring charges beyond FY14. Effecting such

ongoing change may well make this assumption obsolete.

Reconciliation to PMP definition of FCF FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e EBITDA before cash sig items

125.9 96.7 92.8 100.1 76.5 72.2 60.0 55.0 52.0

Cash sig items

-28.8 -5.0 -7.8 10.4 -43.7 -17.0 0.0 0.0

Non cash

-6.9 -2.8

EBITDA cash

108.9 61.0 85.0 92.3 66.1 28.5 43.0 55.0 52.0

Borrowing costs

-18.3 -19.9 -17.2 -16.5 -14.3 -18.0 -9.5 -7.4 -3.1

Income tax paid /(refunds)

-3.7 -2.6 1.8 -1.0 -2.8 0.0 -1.3 -1.1 -1.7

Net change in working capital

-3.2 4.8 5.1 -4.6 -17.6 -3.0 -6.8 -2.2 -2.3

Cash flow from operating activities

83.7 43.3 74.7 70.2 31.4 7.5 25.4 44.3 44.9

Dividends paid

Share buy back

Maintenance capex

-6.0 -6.0 -6.0 -8.0

Expansion capex

91.8 23.4 30.9 39.7 -23.7 -17.7

Disposals

74.8

Dividends paid

-3.4 -6.6 0.0 0.0 -7.3 -9.5

Share buy back

-3.7 -2.7

Gain / (loss) on NZ debt revaluation

3.0 -0.7 -4.3

PMP's definition of Free Cash Flow -0.9 3.1 42.2 27.1 -2.3 54.3 19.4 31.0 27.4

FCF per share

0.17 0.06 0.10 0.08

PMP Ltd


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PMP Research Sep 2013