Novus gets an A for MML acquisition

By now readers of IM will be familiar with printing, packaging and latterly education counter Novus Holdings. But back in April 2021 the old Paarl Media, renamed Novus, was down on its luck. It was an analogue company in a digital age, and investors spurned the counter.

But activist investor A² Investment Partners viewed Novus differently. It saw a stock trading at a huge discount to its NAV, stuffed full of cash, yet having dribbled down to 80c a share. A² — headed by former Hosken Consolidated Investments executive and former KWV CEO André van der Veen — swooped in.

A², which has also taken activists positions at York Timber and packaging group Nampak, acquired an initial 18% stake in Novus from Media24 at 100c a share. Then the company was off to the races.

A three-year retrospective shows that Novus has risen 336% and will, by the time IM hits the shelves, have paid out 140c a share in dividends. Not too shabby for an unloved small cap that just needed a good polish and repositioning. A² has given it just that.

The big shift came in August 2022, when Novus acquired the South African education business of global giant Pearson for R829m. This operation, renamed MML (Maskew Miller Learning), has added a considerable spark to Novus.

MML is the country’s largest publisher of educational textbooks and has a valuable library of content.

It is this intellectual property that could provide the next spur in Novus’s growth as digitisation of the education content, with a dash of AI, brings a whole new augmented offering to the traditional educational book and learning market.

It’s not all been plain sailing. Russia’s invasion of Ukraine exposed Novus to the global surge in paper prices, as much of what it needs is imported. That price surge slammed company earnings. It’s only in the past six months that Novus has returned to the earnings position it last held in the first half of 2021.

Essentially, MML has brought in new revenue at healthy profit margins to balance Novus’s traditional printing and packaging business.

Still, the company continues to trade at a generous discount to NAV.

That discount is a hefty 36%, notwithstanding the company continuing to generate significant cash; at the end of September 2023 it amounted to R621m.

The company decided to withhold dividends in 2023, preferring to repay MML debt

a prudent move in a high interest rate environment.

But to reward patient shareholders, of which A² is by far the largest (now owning about 65% of Novus), the company announced a

50c a share special dividend, which was paid on February 19.

The special dividend pushed the share price to a 52-week high of 513c in midFebruary. The counter is now ex-dividend and IM remains upbeat about it. The results for the year ending in March are set to be released in May.

IM can easily foresee 100c a share in earnings for Novus in 2024

MML has brought in new revenue at healthy profit margins to balance Novus’s traditional printing and packaging business

A bumper financial 2024 relative to the previous financial year seems inevitable.

The main drivers in the

36% rise in interim revenue to R2bn and surge in first-half operating profit to R160m were the recovery of the print margin, the ongoing profitability in the growing packaging division and a strong profit contribution from MML.

By the time the results are released, IM foresees that more ground will have been gained in integrating MML, which tends to have a stronger second half. There should also be further MML debt repayments and continued restructuring of the print business, which should be back into a reasonable degree of profitability.

IM can easily foresee 100c a share in earnings for Novus in 2024. With the stock back to 400c levels after the payment of the special dividend, there is an opportunity to snap up some shares and tag along with the majority activist shareholder. IM expects further special dividends, as Novus has strong cash flows with modest capital expenditure.

IM maintains its “buy” rating, and can justify expecting a 750c share price into 2025 on inherent earnings growth.