Good is not always good enough. Packaging products company Pact Group Holdings Ltd (ASX: PGH) is finding that out today as its shares slipped into the red despite the company posting a big rise in net profit for 2014-15.
The stock fell 0.9% to $4.35 this morning when management unveiled a 42.7% surge in net profit before significant items to $85.2 million as revenue increased 9.3% to $1.25 billion.
The big uplift in profit was underpinned by the five acquisitions it made and the favourable exchange rate, but earnings per share actually fell 34.3% to 23 cents a share due to a large increase in the number of shares on issue.
If significant items were excluded, adjusted earnings per share would come in at just under 29 cents a share, which is still a 17.3% decline from the previous year and below consensus expectations of 29.5 cents a share.
Dividend also missed by a bit with management increasing its final dividend by 5.3% to 10 cents a share to take its full year payout to 19.5 cents a share. Most analysts were tipping a 20 cents a share distribution for the year.
The other negative is the margin compression with Pact Group's earnings before interest, tax, depreciation and amortisation (EBITDA) margin slipping to 16.7% in 2014-15 from 17.3% in the previous year due to competitive pressure and the acquisition of lower margin generating businesses.
However, margins are probably set to improve in the current financial year as management noted that margins in the second half of 2014-15 should achieve greater efficiencies from its cost cutting program.
The benefits from the program will be partially felt in the current financial year before the full benefit is enjoyed in 2016-17. Management didn't quantify the cost benefits but I don't think the EBITDA margin will recover fully in 2015-16.
The group has left the door open on further acquisitions and I suspect we will see management cut more deals as Pact Group has little in the way of a competitive advantage in an industry that is highly competitive.
This means Pact Group needs scale and it has some firepower to do bolt-on acquisitions as it cut $125 million off its net debt position to $440 million and is sitting on a cash pile of $12.7 million at the end of June 30.
Analysts are expecting profit growth of around 10% in 2015-16, which leaves the stock on a price-earnings multiple of around 14x and a forecast yield of 6.3% if you include its franking credits (only 65% of its dividend is franked).
I don't think the stock is cheap enough to attract value investors given the company's current market position and the nature of the industry. Its peer Amcor Limited (ASX: AMC) delivered a better quality result.
