Don’t get your knickers in a twist – a 9% franked yield is sustainable and not that bad!
Recommendation: Buy
Investment Rationale PBG manages some of Australia´s strongest consumer brands. Most products have strong positions in competitive and moderate growth segments. Innovations in design and marketing have lifted sales and margins and this opportunity is available to other brands. The balance sheet could be stronger but the core business should be a consistent and resilient performer, even when facing tougher economic conditions and reduced consumer spending. With manufacturing increasingly outsourced cash generation should readily provide a reliable dividend stream. Do not be unduly concerned by pressure on retailers, PBG is focused on sourcing ‘Everyday Essentials’ with more stability in their demand; to its basic ‘Commodity Value’ it adds Innovation value, Service value and Brand value, three of these attracting the customer and Service adding to its scale and brand names to support a very wide range of retailers. PBG has operated in China for 50 years where 60- 70% of its products are sourced and its scale and strategic relationships give it advantages, although it is also exploring emerging sources. The stock is suitable for yield investors at current prices which in our view now amply discount the lack of growth likely in a more difficult period. Buy today! Event In a record 1H08 to31 December 2007, performance was driven by profitable organic growth and acquisitions. Sales of $1,098.8m were up 26.5% on the pcp. EBITA was $113.9m, up 21.8%, and NPAT was $57.0m, up 6%. EPS, both basic and diluted, rose 6.5% from 10.7¢ to 11.4¢. The interim franked dividend was up 0.5¢ to 8.5¢, holding the 74.9% payout ratio. Net operating cash flow rose 52% to $31.4m – the second half is always the far stronger one. Net interest expense was up from $19.3m to $33.0m due to higher post-acquisition debt and interest rates. Net debt was $825m and net debt/equity was 62.1%, with EBIT covering interest almost four times. The half saw the first full contributions from Yakka and Brand Collective (formerly Globe's Streetwear division). Organic sales growth was 4.7%. EBITDA margin slipped from 11.8% to 11.3% due to the change in business mix following recent acquisitions and increased marketing spend to develop brands. A number of unprofitable lines have been cut to increase the emphasis on core brands and categories. Chinese product price increases and higher energy costs were offset by operational efficiencies including expansion of Chinese warehouse capacity to improve lead times and more direct shipments from supplier to retailer. Impact Management guidance was retained for full year sales and EBITA growth of 15-20% and NPAT growth above 10%. Yakka and Brand Collective integration benefits and other efficiency gains will boost the second half. PBG's everyday brands at value price points limit sensitivity to a weakening retail environment in coming months. A keen focus will remain on efficiency gains. The constrained yet still comfortable balance sheet limits potential for major acquisitions that might boost growth prospects. Just $150m of the $1,050m debt facility matures in February 2009 with the balance over 2010-12. Following a record H1 we expect H2 to show good net cash infliows in the usual pattern. The DRP will remain in place. Rising costs in China will affect the whole market and PBG is relatively well placed. Benefits from integration of Yakka and Brand Collective are in line and ahead of plan and will continue to flow through into FY09. PBG has leveraged its UK operations to extend contract business. Consensus estimates for FY08-10 are ahead of ours which we believe take a conservative view of retail demand and costs. In practice, PBG’s costs of doing business have been falling, although higher 1n H1 due to recent acquisitions, and at some 75% of gross profits, which have risen to 43% of sales, we see ample scope for PBG to weather tough conditions and exceed our estimates. Recommendation Impact PBG should offer sustainable 9% franked yields and subsequently build on them. BUY.
PBG Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
