Investment Matters

Company News: Aveo, Paragon Care and Pact

In parallel with the release of its H1 FY-19 results (see below), Aveo provided an update in relation to its strategic review process which commenced formally last November.  It advised it has received ‘a number of non-binding bids’ for bidders interested in ‘a whole of company transaction’.  It will start a short-listing process later this month, with a proposed transaction excepted to be announced by 30-Jun.  We will obviously keep you informed of developments.

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Pact announced $310-340m of impairment charges for its upcoming H1 result, and an expectation for H1 earnings (EBITDA) of circa $110m.  FY-19 EBITDA is now forecast to be at the low end of its prior guidance.

The (non-cash) impairment charges reflect a reduction on valuation for Pact’s Australian packaging assets – taking into account both difficult trading conditions and a moderated growth outlook.

This announcement reflects that Pact is undergoing a period of business and process change, after a considerable period of acquisitions.  Unfortunately, it is doing this at a time of weak demand conditions, and input price pressures.  Together these are resulting in short term profitability falling someway from what the “normal” profit potential of its overall business.

Pact has good assets, and is in an attractive market (for both organic and M&A led growth).  However, it needs to get its house in order and give the market confidence that it can deliver the sort of returns on its asset base which it has historically been able. We are comfortable holders of Pact, and will use any prolonged period of weakness or miss-pricing of its asset value to build ownership over time.

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Paragon Care released a company update and earnings outlook statement.  For the first time it has split out its “continuing operations business” from the capital intensive business (which it intends to sell shortly).

Given the timing of acquisitions (i.e. when Paragon starts earning profits from its acquisitions), an internal back-office integration process, sale of its capital intensive business, and accounting changes (around leasing expenses), the Paragon financial figures for FY-19 were always going to be messy (expected though). Whilst at a headline level this has resulted in what looks like a downgrade for FY-19 EBITDA from prior guidance, we see the actual like-for-like effect is much less than it appears.

What we assess is important it that the business has been able to show organic growth (like-for-like) of 9% which is strong.  Furthermore, the gross profit margins (and levels) have held up well. As the ERP (enterprise software) and integration rolls through of the business over the next 12 months, we expect bottom line profitability to lift markedly.  We remain confident in this investment and hope that we don’t’ have to deal with a takeover approach before this business has a chance to show its full profit power (in FY-20).

-          Dennison Hambling and Fleur Graves