There’s plenty life left in this old dog

Re-engineering a business to meet changing market demands is no cinch. Novus Holdings, which once earned a comfortable keep in the printing and publishing segment, has needed to rewrite its business model manual to ensure long-term sustainability.

The market is not enthusiastically backing its attempts to adapt to fast-changing trading conditions, but the group should be commended for its efforts to communicate the strategy to investors. At the time of writing, Novus was trading on a historical earnings multiple of just over four and a rich trailing yield of almost 12%.

But it could be some time before Novus can again produce the 2018 earnings number of over 100c a share, with the key Media24 printing contract much pared down.

More pertinent is the forward earnings multiple estimate, which would be between seven and nine based on forecast earnings of between 50c and 60c a share for the financial year to end March 2019. The indicative earnings range may be a tad conservative, so optimistic punters may want to work on a forward multiple of between 5.5 and seven.

IM recently visited Novus’s Cape Town production facilities, where the vibrancy of the operations stands in stark contrast to the dour share price. The effort to broaden the packaging and labelling operations was evident, with a number of blue-chip client contracts easily noticeable.

Management has made it clear that the business is being run “lean and mean” within extremely stringent capital allocation frameworks.

There are good assets in both the printing and packaging segments that can be sweated. Thus it seems unlikely that Novus will at this point mobilise its sizeable cash pile to chase acquisitions.

Management recently confirmed that the immediate focus would be internal, to consolidate and stabilise existing businesses and to maximise sustainability and cashgenerating ability.

There will be acquisition opportunities later (especially if the weak economic conditions linger). Management has set a return on assets target hurdle rate range of 20%-25% for all acquisitions. The goal is still to generate 50% of revenue from “growth or diversified operations” over the medium term.

Management — now led by Neil Birch — is frank about Novus’s challenges. The company recently admitted that “when considering the group balance sheet strength and anticipated sustainable earnings it must be conceded that the return on capital invested is suboptimal”.

So with the sustained cash generation, curtailed acquisition process and asset-sweating regime, the board will be in a position to look at returning “lazy capital” to shareholders in the short term. One sizeable share buyback has already been undertaken.

What is also encouraging is management’s pragmatic approach to the investment in

tissue manufacturing — conceding that the implementation of the acquisition strategy was less than optimal. Management is determined to minimise trading losses in tissue “with the view of exiting the business with an optimum capital recovery”.

A recent trading update, covering the interim period to end-September, pencilled in a drop in basic earnings of around 26c a share (35%) compared with corresponding earnings of 73c a share in 2017. Headline earnings would be short 22c a share (30% down) on last year’s 72c a share.

More instructive are early divisional forecasts that reflected full-year revenue to range between R3.9bn and R4.4bn, with the group margin coming in between 22% and 24%.

Management predicts that the print segment — which accounts for more than 75% of revenue — will hold a margin of 25%-27%. The labels segment is expected to maintain a reassuring margin of 23%-25%.

There’s plenty life left in this old dog. The business niches are tight, but cash flows are decent and the balance sheet is stout. Investors keen to back a management team determined to wring out the best returns possible could be rewarded with steady and sustainable growth in profits and dividends.