Investment Matters

Strong share price rebounds

As noted in Company News last week, Pact announced a debt extension and minor debt restructure.  It also affirmed it expects to meet FY-19 EBITDA (earnings before interest, tax, depreciation and amortisation) guidance.

As background, the company has been undertaking a major restructuring and transformation, enacting operational improvement programs, and turning focus to growth opportunities.  It is taking steps to improve margins and reduce its cost base.  This includes the commencement of a new and well-credentialled CEO in Apr-19.  It follows a difficult period for Pact after completing a number of acquisitions, tough trading conditions, and pressure from input prices.

What happened to the share price?

The announcement was released last Thursday at 9:11 am.  The share price was $2.28ps at the previous close.  After initially falling (10.50am, at $2.215ps), the share price rallied to be +11.4% for the day, closing at $2.54.  On Friday it further rallied +9.8%, closing at $2.79.

[Note: First Samuel did purchase shares on behalf of clients last Thursday, however our buying constituted only 6.8% of the day’s trading volume, at an average price of $2.336 vs market average of $2.421, and so we were not the driver of the share price increase.]

Negativity baked in

There are significant negative expectations built into the share prices of some companies.  Pact is a case in point.  Concerns over Pact’s debt and operational outlook were overdone – the backing of the company from Pact’s financiers bears testament to the confidence they have.  Additionally, perhaps an earnings downgrade had been expected by some – which was also dispelled in the announcement.

It seems like a bottom has formed under Pact’s share price.  However, it would not be surprising to see it bounce around somewhat from here, until we see evidence of the operational turnaround coming through.

We note, however, that it is still cheap.  We are not unrealistic: Pact still does have a hard road ahead as it turns its operational momentum.  But it has a clear path to get there, credible management to do so, and importantly, great assets.   What this does show is how one piece of positive news can cause a quick and sharp rebound in beaten down stocks.

Bigger picture - Our observations

Firstly, it is a market of contrasts: over-factoring in negativity for many companies, but also over exuberance in spades for many others.  Xero, Afterpay, et al, are examples of the latter.   And arguably the big 4 banks are also now examples of over-exuberance (e.g. CBA P/Ef 16.7x and a price/book of 2.1x, source: IRESS).  The current market is notable in regard to the large variations and extremes in P/Es – versus what has been the case historically.  It is a frustrating market from this perspective.

And secondly, we may be starting to see the over reactions (to the positive and negative) moderate.  Paragon is of note this week, with the announcement re the sale of its non-core operations this week (see Company News below) resulting in a +8.4% share price increase on the day of the announcement.

Conclusion

Negative sentiment has been over factored into a number of listed companies.  Sharp and quick rebounds in share prices can occur (and we would not be surprised to see more of this).  Pact is an clear example – with the share price reaction subsequent to its announcement regarding its debt and earnings position.

 - Fleur Graves