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Communisis has delivered H1’18 results which show 9% revenue growth, an increase in underlying profits and a further reduction in net debt. The Value Enhancement Programme is in its first phase but the early strategic progress is encouraging.
Communisis
Communisis has delivered FY17 results slightly ahead of forecasts which show EPS up 5% and a further reduction in Net Debt. The board has also outlined a Value Enhancement Programme to deliver greater value to clients and in the longer-term retain higher margins for the Group.
Like its peers, Communisis is managing a structural transition from the analogue to digital world. This process has not been without its challenges. However, the proof is in the pudding and the performance over the last four years has been impressive. Despite the headlines surrounding declines in traditional print marketing; revenue and profit have grown consistently as has cash generation. The net result is a balance sheet that is de-gearing and a clear path to further improving the overall business mix. Communisis has a particularly strong track record when it comes to winning and retaining high value, multi-year contracts which speaks volumes for the credibility and the breadth of the proposition. The progress made has seen the shares re-rate significantly as investors have sharpened their focus on the returns latent within the business. An attractive, and well covered, dividend yield is the icing on the cake.
First half results show good progress with underlying EPS growth, further debt reduction, dividend up ahead of forecasts and a constructive outcome from the pension review.
2016 was a year of profit and cash growth with like-for-like EPS up 10% and FCF up again to £12.9m. We forecast further profit growth and debt reduction in FY17/18. The shares have rebounded recently but still trade on a P/E of 8x and a FCF yield of 12%.
Communisis' trading update highlights profits in-line with forecasts, net debt lower than we expected and another major contract win. The building blocks are in place for the company to deliver premium earnings and dividend growth over the next couple of years, while paying down debt and potentially benefiting from a lower accounting pension deficit.
Communisis has announced a major contract with HMRC to manage their print and digital distribution to UK tax payers. The 5 year deal should be earnings accretive from Q1 FY18 and importantly opens up the fast developing Government sector.
CMS has today highlighted that since the Interim results, corporate bond yields have further decreased with a resultant increase in the accounting deficit of the Company’s pension scheme. As of 17th October, the pension scheme accounting deficit has risen to £57m, compared to an accounting deficit of £44m as at 30th June.
H1'16 EPS is up by 20%, the dividend is up by 10% and our forecasts remain unchanged. First half trading, as expected, highlighted a tougher demand backdrop for Design services, but importantly there were strong performances from Produce and Deploy, The Board has a clear focus on improving FCF and increasing returns to shareholders.
Communisis helps brands communicate with their customers by email, video, social media, statements, direct mail and at the point of sale. These markets are large and it serves them with a broad digital-to-paper offering and from design to production and logistics. As brands seek support in getting the right message across at the right time via an increasingly broad range of channels, Communisis is very well placed to grow profitably. This range and scale of opportunity, not to mention the existing blue-chip customer base, is ignored in this year’s 8x P/E and 5% dividend yield.
2015 was a year of management delivery with EPS up 12% and FCF doubling to £12m despite some Q4 challenges in Life. We forecast further profit growth and debt reduction in FY16/17. The shares trade at half the valuation of similar companies and we can reach a base case sum of the parts of c70p. We maintain our view that there is a value story in Produce and a very positive growth opportunity in Deploy. Key to a re-rating will be further financial delivery this year.
Wentworth Resources: Outlook for 2016 – powering ahead (BUY) | Weatherly International: Valuation update following interim results (BUY) | Communisis: Growth, rising margins and improving cash flow (BUY)
CMS WEN WTI
The trading update for the year to December'15 is in-line with our forecasts and shows a year of encouraging profit and cash growth. There remains a value and margin story in the Produce division, an encouraging growth pipeline in Deploy and the Design division is positioned for profit improvement. This adds up to 16% EPS growth in FY16 and our forecast of £12m+ of free cash. The shares trade on a P/E of 7x and a FCF yield of 15%. Evidence of P&L and cash delivery this year will drive a re-rating.
Last week’s revelation that a recent acquisition is performing below plan is disappointing, but contrasts against a solid performance in the rest of the group. Consequently, while we have cut EPS forecasts by 6% (and DCF based target price by 3%), we still expect EPS to grow 13% on last year. We forecast rising operating margins, free cash flow and ROCE as the established strategy continues to yield benefits. With risk offset by the FY 2015 P/E of 8.5x, and the 4.9% dividend yield providing some compensation for short-term growing pains, we reiterate our Buy recommendation.
The IMS highlights encouraging Group momentum despite a slower than expected profit ramp from the acquired Life. We expect 12% EPS growth Y/Y in FY15 even after revising forecasts. Our investment case is largely based upon the margin potential in Produce and the potential major growth outlook in Deploy. Both divisions, along with rest of Design, are trading well. We still believe earnings and FCF growth, together with a digital transition, can support a re-rating.
Communisis has invested £52m into front-end design services and securing and mobilising long-term contracts with blue chip clients. The return on this investment supports 14% pa average EPS growth over the next three years, on our estimates, but as the contract wins are for 6-10 years it also provides longer-term visibility. With the shares valued as if growth prospects are minimal, at 8.8x 2015E earnings and with a dividend yield of 4.5%, we initiate with a Buy and 37% upside to our target price.
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CMS is three years into a digital transformation. However, the Company is valued as a commodity printer, reflecting a Group structure which is complex and a financial track record which has delivered profit growth but has lagged in terms of EPS and cash. We believe that will change. Future growth in margins, earnings and cash, together with increased investor visibility of the digital transition, can support a re-rating towards our Target Price of 75p.
Communisis’ H1 update confirms another period of strong growth. Underlying trading is in line with expectations and the integration of recent acquisitions is on track. The recently announced AXA contract went live on 27th April and we see scope for sustained contract momentum with the interims approaching at the end of July. Following this reassuring update and having adjusted for recent euro weakness, the valuation presents a compelling opportunity (7.5x FY15 P/E falling to 6.5x FY16) with significant earnings growth and cash generation in store.
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