Caxton and CTP Publishers and Printers Limited (JSE:CAT)
Caxton (CAT) is a JSE listed publishing, printing, and packaging company that can trace its routes back to 1980 when it was founded by former expert salesmen Terry Moolman and Noel Coburn. They met working together at Republican Press, and their advertising and research backgrounds undoubtedly helped them elevate Caxton into a leading player in the South African print media and advertising industry. Unfortunately, this is an industry that now faces major headwinds, and Caxton’s R9,22 share price, down over 56% since the August 2015 highs of R21 reflects just that.
Caxton is involved in a variety of operations. The first of which is publishing and printing, which generated R2,9bn in revenue in 2021 and accounted for 56% of group revenue. The business currently publishes The Citizen newspaper and 120 local newspapers across South Africa. It’s no secret that the newspaper industry is in decline, more specifically, circulations are 8% lower YoY according to the Audit Bureau of Circulations of South Africa for Q4 2021. The pandemic has only accelerated this process, with business budgets constrained Caxton themselves have reported a further 2% YoY decline in advertising spend.
In response the publishing business has diversified into digital assets such as Afristay.com, Safari.com and PrivateProperty.co.za (the second largest property website in SA). The former two are travel related booking platforms which struggled in 2021 due to the intermittent lockdown regulations curtailing the movement of travelers. However, this is not expected to persist in the long term.
Caxton’s second main business provides packaging to industries including alcohol, frozen food, restaurant takeaways and cigarette boxes. Revenue from packaging operations has grown YoY by 4% to R2,2bn and now makes up 44% of group revenue. The division also reported profits of R275m in 2021, exceeding pre-Covid levels. This growth was in part helped by management’s ability to build paper supplies prior to the global supply chain shortage, enabling Caxton to gain market share from less prepared competitors.
In the medium term the global supply chain shortage has led to both local and global suppliers limiting the tonnage of paper supplied and increasing prices to an extent that is unprecedented in recent history. In response, Caxton’s management has confirmed that they intend to pass the increased input costs on to customers. While this will protect Caxton’s gross profit margin of 8% it could result in lost market share if competitors don’t do the same.
The group has a stable long term operating margin of 7%. This is on par with listed packaging competitor, Nampak and printer, Novus who both fluctuate around the 7% mark. To maintain this while revenues are in decline Caxton’s management has worked hard to make the business more efficient. By consolidating branches and restructuring administration functions operating costs have reduced by as much as 11% in the most recent reporting period. Despite being well-run, the publishing business is cyclical with ad revenue fluctuating through the business cycle. However, their packaging operations do offer a promising long-term opportunity to move the business towards a more stable revenue stream thanks to the defensive nature of their FMCG and tobacco customers.
Caxton’s low margins are indicative of the fragmented and highly competitive publishing and packaging industries that they operate in. Consumers have a plethora of newspapers to choose from, many of which provide little differentiation in content. While the packaging industry is no less competitive. Beer bottle labels and box wine packaging don’t provide much in the way of an economic moat. Having said that, the industry is at least expected to grow by 3% YoY, driven by a shift in consumer buying habits to online platforms.
Caxton has positioned themselves well to benefit from this trend with their 31.6% stake in Mpact, the largest packaging company in Southern Africa. In 2021, Caxton notified the competition commission of their intention to grow their ownership into a controlling stake, but no offer to shareholders has been made yet. Mpact recently released a trading statement reporting a ≈13% YoY increase in revenue to R11,5bn and EBIT growth between 52-59%.
The investment in Mpact may signal what management believes is Caxton’s path to once again growing the top line. Over the past 5 years group revenue has declined at a CAGR of 4%, driven by a 10% CAGR decline in publishing revenue. In comparison, both packaging revenue and EBIT have managed to remain flat over the same period. This week Caxton released a trading statement indicating that the H2 2021 HEPS is expected to be between 66-69 cents per share (cps), which is approximately 80% higher than H2 2020. If this performance continues for the remainder of the financial year, Caxton’s 2022 FY HEPS could reasonably be expected to be around 130cps, a 73% increase over the 2021 FY HEPS of 75cps.
When the full year 2022 financial results are released and reflect markedly improved earnings, it could serve as the catalyst the market is looking for to drive the Caxton share price higher. Another driver of higher HEPS and a potential catalyst for share price appreciation is Caxton’s intention to undertake share buybacks, which shareholders recently approved at the December 2021 AGM. Based on past buybacks this could see up to 20% of issued shares being bought, which assuming all else kept equal, could see the EPS and share price climb by 25%. The combination of buybacks and a continued dividend yield of 5,4% are an effective way of distributing retained earnings to shareholders and make good use of Caxton’s significant cash and cash equivalents of R1,9bn.
Caxton’s balance sheet is extremely robust, with R8bn in assets and R1,6bn in liabilities, for a debt-to-equity ratio of 0,25. Even if the worst-case scenario occurred, and the publishing business had to be shuttered the earnings from the packaging business would be able to cover interest payments 35 times. Cash and PPE alone total R4,3bn, eclipsing the market cap of R3,4bn.
The share is currently trading at a low EV/EBITDA of 2,25x, especially when compared to the SA materials industry average at 4,3x. Caxton is also on a P/NCAV of 1,4 and an even lower P/NAV of 0,54. Meaning an investor can buy this well run, founder led business at a 40%+ discount to net asset value. The DCF performed employs a worst-case scenario in which the publishing business EBITDA declines to zero in 5 years and the packaging business experiences 0 growth into perpetuity. Even in this doomsday scenario Caxton’s intrinsic value emerges at R12,05 per share, providing a 30% margin of safety for investors at the current market price of R9,22.
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