Deep value is a dastardly discipline. Take cash- and asset-rich Caxton & CTP Publishers & Printers, which has seen a nice spurt in its share price in recent weeks and more than a few encouraging observations from armchair asset managers on social media.
My engagement with Caxton stretches back to 2017, when I “famously” observed: “Caxton, which is still earning most of its keep from newspapers, magazines and printing and packaging, could well be regarded as the antithesis of Naspers. Whereas Naspers has been ripped away from its print-media roots by an array of technology investments, Caxton still seems content to tinker with its (well-managed) traditional operations.”
I contended, for good measure, that there may be more than a few contrarian market watchers who prefer the conservative vision of Caxton prime mover Terry Moolman to the all-conquering global thrust of Naspers chair Koos Bekker.
It was only a few months after that article that I scribed another — also referencing Naspers — in which I suggested potential upside of 20% in Caxton. For the record, I boldly set a target price of R16.25 for Caxton’s share price, with the share then (mid-October 2017) trading at R13. Nearly seven years later, at the time of writing this column, the illiquid Caxton share is bobbing at between R12.50 and R13.50.
Admittedly, there would have been a decent flow of dividends from Caxton — but nothing to support strongly my R16-plus conviction about the share in 2017. If there is any recompense, I have persistently backed Caxton’s value proposition in subsequent years (and you’re welcome to scan the FM archives for ample evidence). Hopefully my faith (as a small shareholder) is going to be rewarded fairly soon.
Hopefully, also, the rigid perceptions that have precluded investors from unpacking Caxton’s business properly are falling away. Yes, the Caxton brand is synonymous with the printing and publishing sector, which, like the unfashionable tobacco sector, is seeing (probably irreversible) volume declines. But printing, unfortunately, does not have the luxury of pricing power, like the tobacco industry, to compensate for dwindling volumes.
That Caxton’s printing and publishing hub made R343m in earnings before interest, tax, depreciation and amortisation (ebitda) from revenue of about R3bn tells you all you need to know about the business’s management ethos.
But what should also be abundantly clear from a quick glance at the results for the year to end-June is that Caxton has built a formidable niche packaging hub. Over and above this is a strategic stake in JSE listed Mpact. This presents several options to Caxton, which now trades on an earnings multiple of 6.5, whereas Mpact’s is at about eight. That might seem fair, considering the probable drag of the legacy print operations.
But that’s half the story. At the end of June, Caxton sat with net cash of about R2.5bn after cash generated by operations (including about R88m in working capital released) streamed in strongly at more than R1bn. The cash pile is worth about 700c a share.
What should be abundantly clear from a quick glance at the latest year-to-end-June results is that Caxton has built a formidable niche packaging hub
The stake in Mpact is valued at about R1.4bn, which represents another 390c a share. That’s almost R11 a share tied up in nonoperational aspects, and throws stark light on the valuation of Caxton’s actual printing and packaging operations.
For the effective 170c a share — ah, flip it, let’s call it 200c a share — the market is placing on Caxton’s operations, an investor gets a R956m (260c a share) cash flow from operations and R927m (250c-plus a share) in ebitda. The packaging sector alone generated R492m (close to 140c a share) in ebitda.
With Caxton posting “good-quality” headline earnings of 196c a share, there might be some disappointment at the unchanged 60c a share dividend. Caxton has always been steeped in conservatism, and the packaging sector remains a tough and competitive gig. Naturally, there would inevitably be speculation about whether Caxton would be building its cash pile to take a full tilt at buying out Mpact — which, to date, has not exactly welcomed the advances.
Strong opposition to a Caxton buyout or merger could result in an extended and bruising period of hostilities, which could be costly and might risk management taking their eye off the operational ball.
Personally, I’d prefer Caxton to unbundle the Mpact stake to shareholders, or — perhaps even better (but arguably more difficult) — sell it off. Cash could be mobilised to reinforce Caxton’s existing packaging niches with new acquisitions (would Transpaco not be a nice way to extend reach?) and fund a sumptuous special dividend. Caxton, over the decades, has proved to be a prudent capital allocator, so the next 18 months could be intriguing, with the balance sheet all cashed up and ready to roll.
To turn to another subject: Trustco, the controversial Namibian investment group, certainly adds much colour to the JSE. Last month Trustco issued some frankly eye-popping metrics attached to what might normally be an innocuous share bonus proposal aimed at “ensuring long-term engagement and retention of a key executive”.
The shares vest over five years, with NAV targets set at N$1.5bn, N$3bn, N$4.5bn, N$6bn and N$7.5bn. More startling is the market capitalisation target — set at N$20bn in the first year and stretching by N$5bn a year to reach N$40bn by the end of year five. Trustco’s market value, for the record, is less than R400m.
There’s a lot of enthusiasm about the Namibian economy racing ahead with its recent offshore oil discoveries and an enthusiasm for green hydrogen. Trustco’s optimism is duly noted.
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