Punch International/Xeikon PUN
April 20, 2012 - 12:19pm EST by
Den1200
2012 2013
Price: 2.55 EPS $0.00 $0.00
Shares Out. (in M): 12 P/E 0.0x 0.0x
Market Cap (in $M): 31 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Holding Company
  • Potential Sale
  • Printing

Description

In essence this write up covers two companies, Punch International and Xeikon. Punch International is a Belgian publicly listed holding company whose only reason of existence is that it effectively owns 72.23% of Xeikon, a public company listed in the Netherlands that makes high end digital printing and prepress printing equipment. I think both companies/stocks are cheap. Punch International’s stock price at the close of April 19, 2012 was €2.55 and the one of Xeikon was €2.95. Under some reasonable assumptions, I think Punch International is worth between €7.37 and €9.65 per share and Xeikon is worth between €5.03 and €6.50 per share. More on that later.
 
Punch International:
Ticker: PUN
Exchange: Euronext Brussels
Stock Price: €2.55
Market Cap: €30.5 million
# Shares Outstanding: 11.903 million
Net Debt: €7 million (The rest of the debt is a consolidation of Xeikon and should be looked at on the Xeikon level.) There should also be €2.6 million be coming through the door for the rest of 2012 which should bring net debt down to €5.4 million.
EV: €37.5 million (ex €2.6 million coming in for 2012)
Current Multiple: Using a multiple for normalized after tax income Xeikon, the embedded multiple for Punch International is 2.21 at the current stock price of . (See below under valuation - multiples)
 
Xeikon:
Ticker: XEI
Exchange: Euronext Amsterdam
Stock Price: €2.95
Market Cap: €75.5 million
# Shares Outstanding: 25.60 million
Net Debt: negative €4.1 million (€29.5 minus €33.60 from long term receivables. See net debt comment below.)
EV: €71.4 million
Current Multiple: Using a multiple for normalized after tax income Xeikon, the embedded multiple for Xeikon is 3.95. (See below under valuation - multiples)
 
Punch International used to be run by an energetic turn around manager, Mr. Dumarey. Punch International used to own Xeikon, but also many other companies. If you’d like an idea what Punch International used to look like, read the Feb 5, 2007 VIC write up by vanbr707 on Punch International. All went well until the financial crisis hit when business took a severe downturn which brought Punch International within an inch of bk. Xeikon was impacted by the crisis, but it was mainly the other businesses that sank Punch International. The outcome was that a severely diluting capital raise took place which effectively pushed out Mr. Dumarey. The new owners decided to rationalize the structure with the result that at the end of 2011, Punch’s main asset was the 72.23% held in Xeikon. There are a few other non-strategic assets, like the ownership of a few offices and a 4% interest in a real estate company called Accentis. Both assets are in the process of being sold. I give them a value of about €1.6 million. There is also a note for €7 million due to Xeikon.
 
Since Punch International is a holding company for Xeikon most of my work focuses on Xeikon.
Xeikon produces printing equipment for industrial printing companies. Besides the equipment sales, revenue is also generated by a service segment and a consumables segment. For 2011 the total revenue was €129.7 million of which equipment represented €56.2 million, while consumables and service represented €73.5 million. The service and consumables business are both attractive in that they have a royalty characteristic and carry the highest margins. The digital equipment on average has a functional life expectancy of between 5 and 10 years depending on the intensity of use. The machines wear down in about 5 years if they run 24/7. There are a few clients that do so, but most don’t and the average functional life expectancy is closer to 10 years in that case. In short the printing equipment customer is locked into buying service repairs and consumables from Xeikon (and its distributors) for as long as he uses the equipment. For both the service and consumables there is no alternative. The service argument is obvious, these machines are very specialized and expensive. Having your average mechanic work on them is not the way to go. Also I understand there to be no private label competition for the toner product. The reason is that the toners are built specifically for the digital printers. Now these aren’t your average laser printers you order from Dell. These printers do more than 200 pages per minute and have duty cycles of up to 10 million pages per month. Things have to work really well together to make sure the product comes out correctly at such speeds and workloads. The toner is an integral part of the output and cannot be played with.
One can think of the business as having four segments: A. Digital Label/Packaging Printing B. Digital Document Printing C. Prepress (Ctp - BasysPrint) D. Prepress (Ctp - AGFA). Digital is what is called Computer to Paper. Meaning a file is loaded and sent directly to the digital printer. There are benefits to this process, mostly that it is faster and requires less costs to prepare the printing compared to offset printers and that it is highly customizable. For example one could make a print run that directly prints the addresses for each addressee per sheet. The digital business is the most attractive business for Xeikon and provides most of the EBIT contribution. Prepress/CtP means Computer to Plate. In the traditional offset printing process the printers equipment has to be loaded with plates that are used in the printing process. Prepress is the name for that process. Offset printing used to be CtF (Computer to Film to Plate) where one first has to produce the film that was needed to produces the printing plates. Well with the newer CtP technology that process is more automated eliminating much of the work/cost needed to produce the plates. For a better understanding of the printing process of each segment, check out page 19 of the 2011 Xeikon annual report.
Digital Label/Packaging Printing is the preferred business of Xeikon. Xeikon’s technology is especially well suited for high quality printing and label/packaging printing requires high quality, meaning less competition. Xeikon has a great competitive offering in this segment and plenty of market share to gain which it is doing. It is also a segment that is growing within the overall printing industry.
Xeikon also has great equipment for high quality digital document printing, but over the years the market has become more competitive. Now don’t get me wrong, Xeikon does well in this segment. It’s just that it is a more competitive market that requires less technological specialization nor does it require the same level of quality printing than does the label/packaging segment. It seems the market did somewhat move away from Xeikon towards the lower end. Competition comes very much from inkjet printers which work cheaper, but also deliver lower quality. What turns out is that many of the digital document print jobs don’t need the high quality Xeikon offers. Therefore Xeikon just came out with a new line of printing quality including toner that specifically addresses the issue of lower quality printing at a lower price. Besides the high quality focus, Xeikon will also be offering a solution that adjusts the equipment to use less toner and allow for higher speeds giving the customer the lower cost/lower quality print opportunities it wasn’t able to offer prior.
When it comes to the CtP business the picture is not attractive. If you look at the 2011 numbers you will see that the CtP business had a significant revenue decline of 20%. One because of the weak economy in Europe, but also because the Chinese are catching up with the quality offered by Xeikon and other producers.
Let me start with the CtP machines Xeikon sells under the AGFA name with Xeikon producing the equipment and AGFA selling it. This CtP equipment is high end and focused on very large equipment in the newspaper publishing industry. There is no doubt that the business has some challenges. The digital world is having an impact on the newspaper industry, especially in the developed world. There is still demand for equipment and service globally though. After all, as of June 30 2011, only 30.5% of the global population were users of the internet and if you exclude North America, Western Europe, Japan and Korea the % goes down below 25%. In our lives the internet is ubiquitous but on a global basis only 1 in 4 actually uses the internet. People still read paper newspapers. This is why demand in the developing world is still strong.
The other part of the CtP business is Basysprint. Basysprint equipment kind of does the same as the large AGFA equipment, but then on a smaller more niche based scale. Basysprint has great equipment, but it does suffer from Chinese competition catching up technology wise. The Chinese manufacturers are closing the technology gap and are the lowest price offering out there. In order to turn that around, Xeikon just purchased Flexolaser. The goal is to continue building a technological edge and focus more on specialized niches. I am not sure how successful it will be, but the strategy makes sense.
So we know that the CtP business is having an especially hard time, but the issue is that I don’t care that much. Although the company refuses to give me exact numbers, from conversations with management it was directly pointed out to me that the CtP business is a small part of the EBIT generation. Prepress counts for only 26% of the revenue generated in 2011 and has much lower EBIT margins than digital. Digital is where the money is and the future for digital is attractive.
 
There are a few more Xeikon business issues that need to be addressed.
  • DRUPA: DRUPA is the largest printing equipment exhibition in the world. DRUPA is to someone in the printing industry what Mecca is to a Muslim. It happens every 4 years and is huge with 2,000 exhibitors and more than 390 thousand visitors. Actually it is so impactful it creates its own cyclicality in the industry in that the year before DRUPA equipment sales drag markedly as potential purchasers decide to wait and see what will be on offer at DRUPA first. Well the next DRUPA is about to start on May 3rd 2012 meaning that 2011 Xeikon sales of equipment dragged as it does for every equipment vendor. No one knows by how much, but each prior time Xeikon has attended DRUPA it has seen a catch up of orders come in. More equipment sales also means more consumable sales.
  • European economy: Europe’s economy is having a hard time which does impact Xeikon. In 2010 Xeikon’s sales to Europe were €77.1 million, versus €40.9 million to the US and €11.6 million to Asia. Total revenue for Xeikon declined to €129.8 million in 2011 from €139.3 million in  2010. Sales in the US grew and in Asia stayed flat, but it in Europe, Xeikon’s sales fell by €11 million or 12.5%. The crisis makes customers more conservative in their purchases and people print less when the economy is struggling. Especially Greece, Spain, Italy, Portugal and Ireland are lagging. Lastly it has become very difficult for potential buyers to find financing. Management has expressed to me they have current clients on hold waiting for the opportunity for the financing market to open up again so they can purchase equipment. On the other hand once that economy comes back there will be a lot of postponed demand for replacing and upgrading old equipment as well as increased service and consumable sales.
  • Buyout opportunity: There is a great opportunity for a sale of Xeikon to a large industry player. Xeikon is a small company with limited resources. There are significant benefits to be had on the distribution side. I had discussions with Xeikon about the sales impact of AGFA’s global reach for the larger prepress equipment and they confirmed it has a large impact. The same would be the case if Xeikon would end up under the umbrella of a company like for example Xerox. From speaking to management they confirmed that they often overlap with HP, but there are other large players where Xeikon does not overlap with in offering, like Xerox. There is a lot of value to be had from better distribution. Additional value could be added on the service side. Also there would be additional sales because the “safe buy” argument would disappear. There is no doubt Xeikon loses sales because for many decision makers there is just less career risk in buying from a large competitor than from Xeikon despite the fact that Xeikon often has the better offering. Lastly Xeikon does have limited ability to finance equipment for clients where large players often have the ability to do so.
  • Market share and digital growth: The digital print space is growing globally and will continue to do so. Within its markets Xeikon has maintained or grown its markets share. There is still a long runway. In 2008 digital printing represented 9% of the printing market. By 2013 it is expected to be 16% and by 2018 it should be 34%. Color within the printing segment was 39% in 2008 and is expected to be 51% in 2013 and 68% in 2018. Color is a much more attractive business, a market that Xeikon is focused on. I don’t know if the 2013 industry growth numbers will come to fruition because of the European crisis, but you get the point that there is additional demand for the business. As discussed before, Europe will lag, but there has been good growth in the US and long-term Asia will become a huge market.
  • Accentis: Xeikon owns 554.5 million shares of Accentis for a total of 43.74%. The stock price of Accentis is €0.01. Accentis is another left over from the original pre-financial crisis Punch International story. Most of the real estate related to Punch International companies was put into Accentis. Again when the financial crisis hit Accentis was impacted severely. A capital raise was done not too long ago which Xeikon underwrote and backstopped. Punch International also owns a piece, less than 4%, that it is in the process of selling. Using the current price of €0.01 I value Accentis at €5.5 million or €0.22 per Xeikon share. Xeikon also owns a €26.6 million receivable loan outstanding issued to Accentis, which I will discuss a little later in the write-up. The market value of Accentis at €0.01 is about €12.7 million Euro while Accentis’ equity at the end of 2011 was €42.2 million or €0.033 per share. Equity per share has shrunk a lot over the last few years driven by losses on sales of real estate and overwhelmingly by downward revaluations of the owned real estate. The latest hit was for 2011 for €48.7 million after taking €29.9 million in 2010 and €12.4 million in 2009. In addition there was a €5.3 million hit to Goodwill in 2009. What we end up with is a real estate portfolio that is valued on average at a 8.47% unlevered rate of return based on current depressed levels of rent, which is quite conservative. In 2011, Accentis had recurring operational EBITDA based on currently owned asset of €11.22 million and operational EBIT €11.5 million. Interest payments were €8.7 million. Normalized taxes are expected to be around 25%. So that gets us to a recurring net result of €2.1 million or about 5% of the €42.2 million in equity. We expect the same level of recurring income for 2012. By the end of 2011 vacancy had been reduced to 10% from 18% at the end of 2010. The impact of that should make itself felt especially in 2012. Some more assets will be sold in 2012 and in case the overall occupancy rate can be taken up a few more % we should get some more upside in the short-term. Once the economy in Europe gets better, there should be more opportunity for margin expansion over time. Important too is the debt. Of the €131.6 in debt, €8.7 million is due in 1 year, another €33.5 million is due in 2 to 5 years and the rest, €89.6 million, is due post 5 years. (There is also a €10 million Euro Accentis deferred tax liability whose maturity I do not know.) The secured debt portion of the €131.6 million is €99.9 million or an LTV of 55% (€180 million in real estate value unlevered) which is pretty conservative. The refinancing environment is really tough right now so there is maturity risk. In addition, the cash flow is out of balance with the current loan payments required. In short, the maturities are too short. Accentis is working with its partners at extending the maturities of the underlying loans and a first loan with KBC was extended. Discussions are ongoing with other lenders. In the end, the last thing banks want right now is to get more delinquent assets and it makes sense for them extend the maturity of the loans. After all there is enough cash flow to service the interest on the loans and a reasonable maturity schedule. I have no idea if there is recourse from the secured debt to Accentis so I am just assuming its there. The unsecured portion of the debt is €31.7 million of which €26.6 million is due to Xeikon and €4.145 is due to Summa. Summa is the largest investor in Punch International. It is important to discuss the €26.6 million due to Xeikon. More important than the €5.5 million in equity value which represents only €0.22 per Xeikon share at current market prices, the €26.6 million represents €1.04 per Xeikon share. Losing the €0.22 per Xeikon share in Accentis value is not the worst thing and a fair argument can be made not to include that in the current valuation of Xeikon, but that €26.6 million loan to Accentis does move the needle. I think the €26.6 million will be good for Xeikon. We have current equity value of €42.2 million at Accentis based on a current conservative valuation of the owned real estate at a unlevered cap rate of 8.47% based on today’s depressed rents. Taking another €42.2 million in write downs against the real estate would bring that cap rate up markedly to a level where there would be a lot of willing buyers. If we assume that we take another €42.2 million in write downs on the real estate, the real estate portfolio would be valued at an average unlevered cap rate of 11%. It is rare to have a large and diversified group of real estate assets of this size to buy at cap rates above 10%. Remember this is a portfolio with 90% occupancy. It is not as if half of the buildings are unrentable or need to be rehabbed. If the €42.2 million in equity is wiped out, Xeikon would lose €5.5 million in value related to the equity owned in Accentis, but the €26.6 million should still be good. In short, in order for Xeikon to lose the €26.6 million the effective write down on the current real estate assets would have to be €68.8 million, which would bring the unlevered cap rate of the real estate portfolio to 13.7%. And that would be excluding any other form of new equity issuance, which would be highly dilutive, but would be possible to execute. Another way to limit losses of the €26.6 million would be to do a swap for equity. An Accentis asset that needs attention are Herbolzheim and Schiltach as both are being used by BBS International, a company in the German equivalent of Chapter 11. Currently Accentis is being paid rent and the expectation is this will continue as a buyer has been found for the business and negotiations are on going for a new 20 year lease. Also the Schiltach asset is already valued cheaply on the books. In worst case, the projected rent lost for both assets is about €1.766 million annually. Lastly, Punch International guaranteed the payment of the outstanding secured debt for Accentis for a cost of 1% a year starting in March 2011. The expected payment to Punch International is €1 million. That amount is expected to decline over time as Accentis refinances more assets. The guarantee will expired March 1 2014. By the way, that event will add another €0.75 million in net income to Accentis.
  • Adjusted Net debt: Based on the latest earnings release it is mentioned that the net debt of Xeikon is €29.5 million. It just takes total borrowings and deducts the cash. I disagree with that number and make some adjustments. Look at the €38.2 million in non-current receivables on the 2011 Xeikon balance sheet. Included in there at the end of 2011 are two loans due from Punch International for €7 million and a loan due for €26.6 million from Accentis. The €7 million Punch International loan was part of a €15 million facility and is due December 2015. The collateral against that loan are the Xeikon shares. From Xeikon’s perspective there is little risk related to this receivable. From Punch International’s perspective there is a risk in what happens in case Xeikon’s business comes under pressure. Now since Punch International owns 70% plus of Xeikon it is difficult to see how that loan will be collected by Xeikon, except by creditors of Xeikon in case of a bk situation. There will be about €2.6 million in cash coming to Punch International because of the sale of the last office space, the sale of Accentis stock and the 1% Punch International loan guarantee payment from Accentis. Still not enough to pay down the whole €7 million. From talking to management the idea is overtime to have Xeikon payout a dividend that would then allow Punch International to pay back the loan. In case Xeikon would want to get the €7 million back through a dividend payment now, the total cash cost to Xeikon from doing it now would be €12.93 million as Punch International would get only 72% of that amount and taxes would need to be paid on the amount Xeikon paid out. I discussed the €26.6 million due to Xeikon from Accentis before. I think that value will be good to Xeikon as I find it difficult to see how we will see another €42.2 million adjustment in the real estate value on the books. So in case the €7 million and €26.6 million are good which I believe to be the case, then net debt isn’t €29.5 million, but instead minus €4.1 million or a delta of €1.31 per Xeikon share. After all in case the both loans were paid back tomorrow, Xeikon would have €33.60 million more in cash on its balance sheet.
  • Buybacks: Xeikon bought back 430,047 shares back or about 1.6%. The company does feel the stock is undervalued.
  • Deferred tax assets: Xeikon has net tax deferred assets of €6.6 million or €0.26 per share. Deferred tax assets of €9.964 million and deferred tax liabilities of €3.363 million. I spoke to management and they believe they will exhaust the tax assets in about 3 years.
  • Real Estate: Xeikon bought two buildings from Accentis. One in 2011 (Heultje) and one is in process in 2012 (Ieper Oostkaai). I don’t know what the equity value related to these purchases are to Xeikon. Still it cannot be more than a few million Euros.
 
Regarding Punch International:
  • Exit: Once Punch International pays down the €7 million in debt to Xeikon, a valid case can be made there is no need for Punch International anymore and that Xeikon shares could be transferred to Punch International shareholders. It makes sense. Still that would mean giving up a comfortable control position in Xeikon which might not be what the owners wants. On the other hand, the main investors in Punch International are entrepreneurs that like to make money, not just managers sitting there in order to collect a paycheck. These people have their own money on the line and it seems likely to me they are interested in maximizing the return on their investment.
  • Assets Sale: Punch International is in the process of selling its last few assets, being an interest in Accentis and an ownership in office space for a value of €1.6 million. After that it’ll pretty much be all Xeikon shares that are owned by Punch International.
Valuing Xeikon and Punch International
 
 
 

Valuing Xeikon Core Printing Business

Scenario 1

Scenario 2

Scenario 3

Scenario 4

Shares Outstanding (Million)

            25.60

      25.60

       25.60

       25.60

REBIT 2011 (Million) – (1)

 €         20.00

 €   20.00

 €    20.00

 €    20.00

Normalized Tax

25%

25%

25%

25%

Taxes (Million)

 €           5.00

 €     5.00

 €      5.00

 €      5.00

Normalized Net Income Unlevered (Million)

 €         15.00

 €   15.00

 €    15.00

 €    15.00

Multiple Used – (2)

                2.5

         5.0

          7.5

         10.0

Unlevered Value Xeikon Core Business (Million)

 €         37.50

 €   75.00

 €  112.50

 €  150.00

Unlevered Value Xeikon Core Business Per Xeikon Share

 €           1.46

 €     2.93

 €      4.39

 €      5.86

 

 

 

 

 

Adjusted Net Debt Xeikon (3)

 

 

 

 

Net Debt Xeikon (Million)

 €         29.50

 €   29.50

 €    29.50

 €    29.50

Long Term Receivables Xeikon (Million)

€         33.60

€   33.60

€    33.60

€    33.60

Net Debt Minus LT Receivables Xeikon (Million)

 €          (4.10)

 €    (4.10)

 €     (4.10)

 €     (4.10)

Net Debt Minus LT Receivables Per Xeikon Share

 €          (0.16)

 €    (0.16)

 €     (0.16)

 €     (0.16)

 

 

 

 

 

Value Deferred Taxes Xeikon – (4)

 

 

 

 

Value of Deferred Taxes Xeikon (Million)

 €           6.60

 €     6.60

 €      6.60

 €      6.60

Value of Deferred Taxes Per Xeikon Share

€           0.26

€     0.26

€      0.26

€      0.26

 

 

 

 

 

Value Accentis - (5)

 

 

 

 

Value Accentis for Xeikon

 €           5.55

 €     5.55

 €      5.55

 €      5.55

Value Accentis Per Share of Xeikon

 €           0.22

 €     0.22

 €      0.22

 €      0.22

 

 

 

 

 

IV Xeikon Per Share Based On Multiple Used

 €           2.10

 €     3.56

 €      5.03

 €      6.49

 

 

 

 

 

Valuing Punch International

 

 

 

 

# Shares Outstanding Punch International (Million)

            11.90

      11.90

       11.90

       11.90

Multiple Used For Xeikon - (2)

                2.5

         5.0

          7.5

         10.0

IV Xeikon Per Share Based On Multiple Used

 €           2.10

 €     3.56

 €      5.03

 €      6.49

IV Market Cap Xeikon (Million)

 €         53.75

 €   91.25

 €  128.75

 €  166.25

Punch ownership of Xeikon

72.23%

72.23%

72.23%

72.23%

Value Xeikon to Punch (Million)

 €         38.83

 €   65.91

 €    93.00

 €  120.09

Value Xeikon to Punch Per Punch Share

 €           3.26

 €     5.54

 €      7.81

 €    10.09

Debt Punch to Xeikon Per Punch Share (7 million Euro) – (6)

 €           0.59

 €     0.59

 €      0.59

 €      0.59

Value Ieper and Accentis (7)

 €           0.14

 €     0.14

 €      0.14

 €      0.14

IV Punch Based On IV Xeikon Per Punch Share

 €           2.81

 €     5.09

 €      7.36

 €      9.64

 
Notes regarding valuation:
(1)   Normalized EBIT: I feel comfortable with €20 million. The company achieved close to those numbers in both 2010 and 2011 all the while it has been in a challenging economic environment with first the credit crisis, then the European sovereign debt crisis, both resulting in a cyclical downturn in printing demand, a wait an see attitude amongst clients and a difficult financing environment. And lastly there was the cyclical downturn for the last year because of DRUPA, as describe above. I think that given the challenges of the last 5 years the €20 million number is conservative in its own right in that we should see an increase in orders for equipment and consumables from DRUPA, increased distribution in the US and Asia, a financing environment that is depressed, etc. In short, not much needs to go right in order for EBIT to start exceeding the projected €20 million. On the other hand, there is a risk on the horizon of a European economy doing even worse than it is doing now. This would have little impact related to their Greek, Spanish, Italian, Portuguese and Irish sales as those countries are already in a state of depression and sales have been depressed for many years in those countries, but the impact from sales to Northern Europe would be impacted. Lastly, don’t forget that 57% of revenues is consumables and service, the segment with the highest profit margins and since equipment lasts between 5 and 10 years it would take some time for that to roll off.
(2)   Multiples: The multiples are what drives the difference in valuation between the different scenarios listed above.
In scenario 1 I use a 2.5 times multiple to show how cheap the embedded multiple of Xeikon per Punch International share is at this time. Actually at today’s price for Punch International of €2.55, the embedded multiple for Xeikon is 2.21.
In scenario 2 I use a multiple of 5 in order to show how cheap Xeikon itself is at this time. At the current price of €2.95 per Xeikon share, the current embedded multiple is 3.95.
For scenario 3 and 4 I used what I think should be a fair conservative multiple for Xeikon, being between 7.5 and 10 times. Using a 7.5 multiple for Xeikon, one gets an IV of €5.03 for Xeikon and €7.36 for Punch International. If one uses a 10 multiple for Xeikon, one gets an IV of €6.49 for Xeikon and €9.64 for Punch International. Currently Xeikon trades for €2.95 per share and Punch International for € 2.55 per share.
(3)   Adjusted Net Debt Xeikon: Above I already discussed this issue in more detail. The €7 million due Xeikon from Punch International and the €26.6 million due Xeikon from Accentis are real assets. In case both receivables/loans would be paid back tomorrow, there would be an additional €33.6 million in cash on the balance sheet. I do believe there is minimal risk to Xeikon regarding the €7 million due from Punch International. And regarding the €26.6 million due from Accentis it is difficult to see how that value will end up impaired over time. The haircuts needed on Accentis assets is just massive for Xeikon to lose the €26.6 million in asset value.
(4)   Deferred Tax Assets: Xeikon has net tax deferred assets of €6.6 million or €0.26 per share. Deferred tax assets of €9.964 million and deferred tax liabilities of €3.363 million.
(5)    

Value Accentis % of Xeikon

 

# Shares Outstanding (million)

            1,270

Price

 €           0.01

Market Cap (Million)

 €         12.70

Ownership Xeikon

43.74%

Current Value Accentis to Xeikon (Millions)

 €           5.55

# Shares Outstanding Xeikon (Millions)

            25.60

Current Value Accentis to Xeikon Per Share

 €           0.22

(6)   €7 million Loan From Xeikon: Punch International owes €7 million or €0.59 per Punch International to Xeikon, which we deduct from the IV of Punch International.
(7)   Other Assets Punch International: Punch International already has signed contract for the sale of the last office spaces on its books. It is also actively in the process of selling its 4% interest in Accentis and it is due a payment of about €1 million in 2012 from Accentis. This puts the total cash coming in during 2012 at about €2.6 million. I deducted €1 million of that number in order to be conservative. Per Punch International share that is a value of €0.14 per share.
 
Risks:
  • ·1% guarantee Punch International to Accentis: Punch International guarantees €100 million in secured debt for Accentis. That would require a write down of €42.2 in Accentis equity value and €26.6 million in the loan from Xeikon to Accentis. A €100 million valuation of the Accentis real estate portfolio represents a 13.7% unlevered cap rate. I can’t imagine certain parties not being interested in this portfolio for this price. Btw. a 13.7% unlevered cap rate with a 50% LTV results in a pre tax return of 20.2%.
  • ·The economy, especially the European one, as was discussed prior.
  • ·The Prepress business going away: Well I think it is going away over time. But as discussed above, while it does provide some profit, the margin and EBIT contribution is small. The Xeikon story is about the digital market.
  • ·The Xeikon digital technology: As we have seen, the Prepress/Basysprint business is under a lot of pressure. Is this likely to happen to the digital business? I believe this not to be the case. These digital printers are high end. Xeikon improves the technology each year regarding cost of use, speed, quality, etc. The digital equipment is much more complex than the prepress equipment. It is not just the equipment, but also the toner requires constant improvement and is an integral part of the printing offering.
  • ·The Accentis equity value going to zero, which I think is a possibility, and the €26.6 million loan to Accentis being a total loss to Xeikon, which I think is highly unlikely. Below is the impact on the Xeikon and Punch International IV in case one (the Accentis equity value) or both (the Accentis equity value and the €26.6 million) go to zero.

 

Scenario 1

Scenario 2

Scenario 3

Scenario 4

Accentis Equity Value Goes To Zero New Xeikon IV

 €        1.88

 €     3.35

 €      4.81

 €      6.28

Accentis Equity Value Goes To Zero New Punch IV

 €        2.48

 €     4.75

 €      7.03

 €      9.30

 

 

 

 

 

Accentis Equity Value and 26.6 MM Loan Goes To Zero New Xeikon IV

 €        0.84

 €     2.31

 €      3.77

 €      5.24

Accentis Equity Value and 26.6 MM Loan Goes To Zero New Punch IV

 €        0.86

 €     3.14

 €      5.41

 €      7.69

  • ·Management doing stupid stuff: Could happen. I am worried that they will continue to try to “fix” the prepress business over the long-term. On the other hand, the large shareholders of Punch International have their own money invested and are rational entrepreneurial investors. I doubt they will sit by idle.
Conclusion:
I believe both companies to be cheap. At today’s price of €2.55 for Punch International the embedded multiple for Xeikon is 2.21. And at today’s price for Xeikon, today’s embedded multiple is 3.95. In valuing Xeikon and Punch International, I believe I used conservative multiples that are reasonably conservative. For one, I believe Xeikon would be worth the 10 times multiple I used or even more.
On the other hand, one must admit there is a fair amount of uncertainty, like the outcome on Accentis and the Xeikon operating environment. Still I think the current valuation compensates for this risk.

Catalyst

  1. An improvement of the Xeikon operating environment resulting in higher normalized EBIT.
  2. A sale of Xeikon to a larger player. I don’t doubt at all that a large player with an much larger distribution network and the ability to finance would be able to increase sales and EBIT markedly over the €20 million in normalized EBIT I used prior.
  3. A spin off of the Xeikon shares held by Punch International to Punch International shareholders. First they will need to take care of that €7 million loan due to Xeikon.
  4. An increase in the multiple of Xeikon which would have a leveraged effect on Punch International.
  5. For 2012, the Punch International financial statements will basically be a consolidation of Xeikon resulting is a clearer overview of what Punch International will be worth.
  6. Accentis being refinanced and stabilized completely taking away uncertainty around the €26.6 million loan due to Xeikon. This would also provide for upside to Xeikon for the equity it owns. Actually even better would be if Accentis or its assets would be sold resulting in less risk to or even a repayment of the €26.6 million to Xeikon and maybe some upside on the equity ownership. I do think Accentis drives uncertainty around the Xeikon stock.
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    Description

    In essence this write up covers two companies, Punch International and Xeikon. Punch International is a Belgian publicly listed holding company whose only reason of existence is that it effectively owns 72.23% of Xeikon, a public company listed in the Netherlands that makes high end digital printing and prepress printing equipment. I think both companies/stocks are cheap. Punch International’s stock price at the close of April 19, 2012 was €2.55 and the one of Xeikon was €2.95. Under some reasonable assumptions, I think Punch International is worth between €7.37 and €9.65 per share and Xeikon is worth between €5.03 and €6.50 per share. More on that later.
     
    Punch International:
    Ticker: PUN
    Exchange: Euronext Brussels
    Stock Price: €2.55
    Market Cap: €30.5 million
    # Shares Outstanding: 11.903 million
    Net Debt: €7 million (The rest of the debt is a consolidation of Xeikon and should be looked at on the Xeikon level.) There should also be €2.6 million be coming through the door for the rest of 2012 which should bring net debt down to €5.4 million.
    EV: €37.5 million (ex €2.6 million coming in for 2012)
    Current Multiple: Using a multiple for normalized after tax income Xeikon, the embedded multiple for Punch International is 2.21 at the current stock price of . (See below under valuation - multiples)
     
    Xeikon:
    Ticker: XEI
    Exchange: Euronext Amsterdam
    Stock Price: €2.95
    Market Cap: €75.5 million
    # Shares Outstanding: 25.60 million
    Net Debt: negative €4.1 million (€29.5 minus €33.60 from long term receivables. See net debt comment below.)
    EV: €71.4 million
    Current Multiple: Using a multiple for normalized after tax income Xeikon, the embedded multiple for Xeikon is 3.95. (See below under valuation - multiples)
     
    Punch International used to be run by an energetic turn around manager, Mr. Dumarey. Punch International used to own Xeikon, but also many other companies. If you’d like an idea what Punch International used to look like, read the Feb 5, 2007 VIC write up by vanbr707 on Punch International. All went well until the financial crisis hit when business took a severe downturn which brought Punch International within an inch of bk. Xeikon was impacted by the crisis, but it was mainly the other businesses that sank Punch International. The outcome was that a severely diluting capital raise took place which effectively pushed out Mr. Dumarey. The new owners decided to rationalize the structure with the result that at the end of 2011, Punch’s main asset was the 72.23% held in Xeikon. There are a few other non-strategic assets, like the ownership of a few offices and a 4% interest in a real estate company called Accentis. Both assets are in the process of being sold. I give them a value of about €1.6 million. There is also a note for €7 million due to Xeikon.
     
    Since Punch International is a holding company for Xeikon most of my work focuses on Xeikon.
    Xeikon produces printing equipment for industrial printing companies. Besides the equipment sales, revenue is also generated by a service segment and a consumables segment. For 2011 the total revenue was €129.7 million of which equipment represented €56.2 million, while consumables and service represented €73.5 million. The service and consumables business are both attractive in that they have a royalty characteristic and carry the highest margins. The digital equipment on average has a functional life expectancy of between 5 and 10 years depending on the intensity of use. The machines wear down in about 5 years if they run 24/7. There are a few clients that do so, but most don’t and the average functional life expectancy is closer to 10 years in that case. In short the printing equipment customer is locked into buying service repairs and consumables from Xeikon (and its distributors) for as long as he uses the equipment. For both the service and consumables there is no alternative. The service argument is obvious, these machines are very specialized and expensive. Having your average mechanic work on them is not the way to go. Also I understand there to be no private label competition for the toner product. The reason is that the toners are built specifically for the digital printers. Now these aren’t your average laser printers you order from Dell. These printers do more than 200 pages per minute and have duty cycles of up to 10 million pages per month. Things have to work really well together to make sure the product comes out correctly at such speeds and workloads. The toner is an integral part of the output and cannot be played with.
    One can think of the business as having four segments: A. Digital Label/Packaging Printing B. Digital Document Printing C. Prepress (Ctp - BasysPrint) D. Prepress (Ctp - AGFA). Digital is what is called Computer to Paper. Meaning a file is loaded and sent directly to the digital printer. There are benefits to this process, mostly that it is faster and requires less costs to prepare the printing compared to offset printers and that it is highly customizable. For example one could make a print run that directly prints the addresses for each addressee per sheet. The digital business is the most attractive business for Xeikon and provides most of the EBIT contribution. Prepress/CtP means Computer to Plate. In the traditional offset printing process the printers equipment has to be loaded with plates that are used in the printing process. Prepress is the name for that process. Offset printing used to be CtF (Computer to Film to Plate) where one first has to produce the film that was needed to produces the printing plates. Well with the newer CtP technology that process is more automated eliminating much of the work/cost needed to produce the plates. For a better understanding of the printing process of each segment, check out page 19 of the 2011 Xeikon annual report.
    Digital Label/Packaging Printing is the preferred business of Xeikon. Xeikon’s technology is especially well suited for high quality printing and label/packaging printing requires high quality, meaning less competition. Xeikon has a great competitive offering in this segment and plenty of market share to gain which it is doing. It is also a segment that is growing within the overall printing industry.
    Xeikon also has great equipment for high quality digital document printing, but over the years the market has become more competitive. Now don’t get me wrong, Xeikon does well in this segment. It’s just that it is a more competitive market that requires less technological specialization nor does it require the same level of quality printing than does the label/packaging segment. It seems the market did somewhat move away from Xeikon towards the lower end. Competition comes very much from inkjet printers which work cheaper, but also deliver lower quality. What turns out is that many of the digital document print jobs don’t need the high quality Xeikon offers. Therefore Xeikon just came out with a new line of printing quality including toner that specifically addresses the issue of lower quality printing at a lower price. Besides the high quality focus, Xeikon will also be offering a solution that adjusts the equipment to use less toner and allow for higher speeds giving the customer the lower cost/lower quality print opportunities it wasn’t able to offer prior.
    When it comes to the CtP business the picture is not attractive. If you look at the 2011 numbers you will see that the CtP business had a significant revenue decline of 20%. One because of the weak economy in Europe, but also because the Chinese are catching up with the quality offered by Xeikon and other producers.
    Let me start with the CtP machines Xeikon sells under the AGFA name with Xeikon producing the equipment and AGFA selling it. This CtP equipment is high end and focused on very large equipment in the newspaper publishing industry. There is no doubt that the business has some challenges. The digital world is having an impact on the newspaper industry, especially in the developed world. There is still demand for equipment and service globally though. After all, as of June 30 2011, only 30.5% of the global population were users of the internet and if you exclude North America, Western Europe, Japan and Korea the % goes down below 25%. In our lives the internet is ubiquitous but on a global basis only 1 in 4 actually uses the internet. People still read paper newspapers. This is why demand in the developing world is still strong.
    The other part of the CtP business is Basysprint. Basysprint equipment kind of does the same as the large AGFA equipment, but then on a smaller more niche based scale. Basysprint has great equipment, but it does suffer from Chinese competition catching up technology wise. The Chinese manufacturers are closing the technology gap and are the lowest price offering out there. In order to turn that around, Xeikon just purchased Flexolaser. The goal is to continue building a technological edge and focus more on specialized niches. I am not sure how successful it will be, but the strategy makes sense.
    So we know that the CtP business is having an especially hard time, but the issue is that I don’t care that much. Although the company refuses to give me exact numbers, from conversations with management it was directly pointed out to me that the CtP business is a small part of the EBIT generation. Prepress counts for only 26% of the revenue generated in 2011 and has much lower EBIT margins than digital. Digital is where the money is and the future for digital is attractive.
     
    There are a few more Xeikon business issues that need to be addressed.
    • DRUPA: DRUPA is the largest printing equipment exhibition in the world. DRUPA is to someone in the printing industry what Mecca is to a Muslim. It happens every 4 years and is huge with 2,000 exhibitors and more than 390 thousand visitors. Actually it is so impactful it creates its own cyclicality in the industry in that the year before DRUPA equipment sales drag markedly as potential purchasers decide to wait and see what will be on offer at DRUPA first. Well the next DRUPA is about to start on May 3rd 2012 meaning that 2011 Xeikon sales of equipment dragged as it does for every equipment vendor. No one knows by how much, but each prior time Xeikon has attended DRUPA it has seen a catch up of orders come in. More equipment sales also means more consumable sales.
    • European economy: Europe’s economy is having a hard time which does impact Xeikon. In 2010 Xeikon’s sales to Europe were €77.1 million, versus €40.9 million to the US and €11.6 million to Asia. Total revenue for Xeikon declined to €129.8 million in 2011 from €139.3 million in  2010. Sales in the US grew and in Asia stayed flat, but it in Europe, Xeikon’s sales fell by €11 million or 12.5%. The crisis makes customers more conservative in their purchases and people print less when the economy is struggling. Especially Greece, Spain, Italy, Portugal and Ireland are lagging. Lastly it has become very difficult for potential buyers to find financing. Management has expressed to me they have current clients on hold waiting for the opportunity for the financing market to open up again so they can purchase equipment. On the other hand once that economy comes back there will be a lot of postponed demand for replacing and upgrading old equipment as well as increased service and consumable sales.
    • Buyout opportunity: There is a great opportunity for a sale of Xeikon to a large industry player. Xeikon is a small company with limited resources. There are significant benefits to be had on the distribution side. I had discussions with Xeikon about the sales impact of AGFA’s global reach for the larger prepress equipment and they confirmed it has a large impact. The same would be the case if Xeikon would end up under the umbrella of a company like for example Xerox. From speaking to management they confirmed that they often overlap with HP, but there are other large players where Xeikon does not overlap with in offering, like Xerox. There is a lot of value to be had from better distribution. Additional value could be added on the service side. Also there would be additional sales because the “safe buy” argument would disappear. There is no doubt Xeikon loses sales because for many decision makers there is just less career risk in buying from a large competitor than from Xeikon despite the fact that Xeikon often has the better offering. Lastly Xeikon does have limited ability to finance equipment for clients where large players often have the ability to do so.
    • Market share and digital growth: The digital print space is growing globally and will continue to do so. Within its markets Xeikon has maintained or grown its markets share. There is still a long runway. In 2008 digital printing represented 9% of the printing market. By 2013 it is expected to be 16% and by 2018 it should be 34%. Color within the printing segment was 39% in 2008 and is expected to be 51% in 2013 and 68% in 2018. Color is a much more attractive business, a market that Xeikon is focused on. I don’t know if the 2013 industry growth numbers will come to fruition because of the European crisis, but you get the point that there is additional demand for the business. As discussed before, Europe will lag, but there has been good growth in the US and long-term Asia will become a huge market.
    • Accentis: Xeikon owns 554.5 million shares of Accentis for a total of 43.74%. The stock price of Accentis is €0.01. Accentis is another left over from the original pre-financial crisis Punch International story. Most of the real estate related to Punch International companies was put into Accentis. Again when the financial crisis hit Accentis was impacted severely. A capital raise was done not too long ago which Xeikon underwrote and backstopped. Punch International also owns a piece, less than 4%, that it is in the process of selling. Using the current price of €0.01 I value Accentis at €5.5 million or €0.22 per Xeikon share. Xeikon also owns a €26.6 million receivable loan outstanding issued to Accentis, which I will discuss a little later in the write-up. The market value of Accentis at €0.01 is about €12.7 million Euro while Accentis’ equity at the end of 2011 was €42.2 million or €0.033 per share. Equity per share has shrunk a lot over the last few years driven by losses on sales of real estate and overwhelmingly by downward revaluations of the owned real estate. The latest hit was for 2011 for €48.7 million after taking €29.9 million in 2010 and €12.4 million in 2009. In addition there was a €5.3 million hit to Goodwill in 2009. What we end up with is a real estate portfolio that is valued on average at a 8.47% unlevered rate of return based on current depressed levels of rent, which is quite conservative. In 2011, Accentis had recurring operational EBITDA based on currently owned asset of €11.22 million and operational EBIT €11.5 million. Interest payments were €8.7 million. Normalized taxes are expected to be around 25%. So that gets us to a recurring net result of €2.1 million or about 5% of the €42.2 million in equity. We expect the same level of recurring income for 2012. By the end of 2011 vacancy had been reduced to 10% from 18% at the end of 2010. The impact of that should make itself felt especially in 2012. Some more assets will be sold in 2012 and in case the overall occupancy rate can be taken up a few more % we should get some more upside in the short-term. Once the economy in Europe gets better, there should be more opportunity for margin expansion over time. Important too is the debt. Of the €131.6 in debt, €8.7 million is due in 1 year, another €33.5 million is due in 2 to 5 years and the rest, €89.6 million, is due post 5 years. (There is also a €10 million Euro Accentis deferred tax liability whose maturity I do not know.) The secured debt portion of the €131.6 million is €99.9 million or an LTV of 55% (€180 million in real estate value unlevered) which is pretty conservative. The refinancing environment is really tough right now so there is maturity risk. In addition, the cash flow is out of balance with the current loan payments required. In short, the maturities are too short. Accentis is working with its partners at extending the maturities of the underlying loans and a first loan with KBC was extended. Discussions are ongoing with other lenders. In the end, the last thing banks want right now is to get more delinquent assets and it makes sense for them extend the maturity of the loans. After all there is enough cash flow to service the interest on the loans and a reasonable maturity schedule. I have no idea if there is recourse from the secured debt to Accentis so I am just assuming its there. The unsecured portion of the debt is €31.7 million of which €26.6 million is due to Xeikon and €4.145 is due to Summa. Summa is the largest investor in Punch International. It is important to discuss the €26.6 million due to Xeikon. More important than the €5.5 million in equity value which represents only €0.22 per Xeikon share at current market prices, the €26.6 million represents €1.04 per Xeikon share. Losing the €0.22 per Xeikon share in Accentis value is not the worst thing and a fair argument can be made not to include that in the current valuation of Xeikon, but that €26.6 million loan to Accentis does move the needle. I think the €26.6 million will be good for Xeikon. We have current equity value of €42.2 million at Accentis based on a current conservative valuation of the owned real estate at a unlevered cap rate of 8.47% based on today’s depressed rents. Taking another €42.2 million in write downs against the real estate would bring that cap rate up markedly to a level where there would be a lot of willing buyers. If we assume that we take another €42.2 million in write downs on the real estate, the real estate portfolio would be valued at an average unlevered cap rate of 11%. It is rare to have a large and diversified group of real estate assets of this size to buy at cap rates above 10%. Remember this is a portfolio with 90% occupancy. It is not as if half of the buildings are unrentable or need to be rehabbed. If the €42.2 million in equity is wiped out, Xeikon would lose €5.5 million in value related to the equity owned in Accentis, but the €26.6 million should still be good. In short, in order for Xeikon to lose the €26.6 million the effective write down on the current real estate assets would have to be €68.8 million, which would bring the unlevered cap rate of the real estate portfolio to 13.7%. And that would be excluding any other form of new equity issuance, which would be highly dilutive, but would be possible to execute. Another way to limit losses of the €26.6 million would be to do a swap for equity. An Accentis asset that needs attention are Herbolzheim and Schiltach as both are being used by BBS International, a company in the German equivalent of Chapter 11. Currently Accentis is being paid rent and the expectation is this will continue as a buyer has been found for the business and negotiations are on going for a new 20 year lease. Also the Schiltach asset is already valued cheaply on the books. In worst case, the projected rent lost for both assets is about €1.766 million annually. Lastly, Punch International guaranteed the payment of the outstanding secured debt for Accentis for a cost of 1% a year starting in March 2011. The expected payment to Punch International is €1 million. That amount is expected to decline over time as Accentis refinances more assets. The guarantee will expired March 1 2014. By the way, that event will add another €0.75 million in net income to Accentis.
    • Adjusted Net debt: Based on the latest earnings release it is mentioned that the net debt of Xeikon is €29.5 million. It just takes total borrowings and deducts the cash. I disagree with that number and make some adjustments. Look at the €38.2 million in non-current receivables on the 2011 Xeikon balance sheet. Included in there at the end of 2011 are two loans due from Punch International for €7 million and a loan due for €26.6 million from Accentis. The €7 million Punch International loan was part of a €15 million facility and is due December 2015. The collateral against that loan are the Xeikon shares. From Xeikon’s perspective there is little risk related to this receivable. From Punch International’s perspective there is a risk in what happens in case Xeikon’s business comes under pressure. Now since Punch International owns 70% plus of Xeikon it is difficult to see how that loan will be collected by Xeikon, except by creditors of Xeikon in case of a bk situation. There will be about €2.6 million in cash coming to Punch International because of the sale of the last office space, the sale of Accentis stock and the 1% Punch International loan guarantee payment from Accentis. Still not enough to pay down the whole €7 million. From talking to management the idea is overtime to have Xeikon payout a dividend that would then allow Punch International to pay back the loan. In case Xeikon would want to get the €7 million back through a dividend payment now, the total cash cost to Xeikon from doing it now would be €12.93 million as Punch International would get only 72% of that amount and taxes would need to be paid on the amount Xeikon paid out. I discussed the €26.6 million due to Xeikon from Accentis before. I think that value will be good to Xeikon as I find it difficult to see how we will see another €42.2 million adjustment in the real estate value on the books. So in case the €7 million and €26.6 million are good which I believe to be the case, then net debt isn’t €29.5 million, but instead minus €4.1 million or a delta of €1.31 per Xeikon share. After all in case the both loans were paid back tomorrow, Xeikon would have €33.60 million more in cash on its balance sheet.
    • Buybacks: Xeikon bought back 430,047 shares back or about 1.6%. The company does feel the stock is undervalued.
    • Deferred tax assets: Xeikon has net tax deferred assets of €6.6 million or €0.26 per share. Deferred tax assets of €9.964 million and deferred tax liabilities of €3.363 million. I spoke to management and they believe they will exhaust the tax assets in about 3 years.
    • Real Estate: Xeikon bought two buildings from Accentis. One in 2011 (Heultje) and one is in process in 2012 (Ieper Oostkaai). I don’t know what the equity value related to these purchases are to Xeikon. Still it cannot be more than a few million Euros.
     
    Regarding Punch International:
    • Exit: Once Punch International pays down the €7 million in debt to Xeikon, a valid case can be made there is no need for Punch International anymore and that Xeikon shares could be transferred to Punch International shareholders. It makes sense. Still that would mean giving up a comfortable control position in Xeikon which might not be what the owners wants. On the other hand, the main investors in Punch International are entrepreneurs that like to make money, not just managers sitting there in order to collect a paycheck. These people have their own money on the line and it seems likely to me they are interested in maximizing the return on their investment.
    • Assets Sale: Punch International is in the process of selling its last few assets, being an interest in Accentis and an ownership in office space for a value of €1.6 million. After that it’ll pretty much be all Xeikon shares that are owned by Punch International.
    Valuing Xeikon and Punch International
     
     
     

    Valuing Xeikon Core Printing Business

    Scenario 1

    Scenario 2

    Scenario 3

    Scenario 4

    Shares Outstanding (Million)

                25.60

          25.60

           25.60

           25.60

    REBIT 2011 (Million) – (1)

     €         20.00

     €   20.00

     €    20.00

     €    20.00

    Normalized Tax

    25%

    25%

    25%

    25%

    Taxes (Million)

     €           5.00

     €     5.00

     €      5.00

     €      5.00

    Normalized Net Income Unlevered (Million)

     €         15.00

     €   15.00

     €    15.00

     €    15.00

    Multiple Used – (2)

                    2.5

             5.0

              7.5

             10.0

    Unlevered Value Xeikon Core Business (Million)

     €         37.50

     €   75.00

     €  112.50

     €  150.00

    Unlevered Value Xeikon Core Business Per Xeikon Share

     €           1.46

     €     2.93

     €      4.39

     €      5.86

     

     

     

     

     

    Adjusted Net Debt Xeikon (3)

     

     

     

     

    Net Debt Xeikon (Million)

     €         29.50

     €   29.50

     €    29.50

     €    29.50

    Long Term Receivables Xeikon (Million)

    €         33.60

    €   33.60

    €    33.60

    €    33.60

    Net Debt Minus LT Receivables Xeikon (Million)

     €          (4.10)

     €    (4.10)

     €     (4.10)

     €     (4.10)

    Net Debt Minus LT Receivables Per Xeikon Share

     €          (0.16)

     €    (0.16)

     €     (0.16)

     €     (0.16)

     

     

     

     

     

    Value Deferred Taxes Xeikon – (4)

     

     

     

     

    Value of Deferred Taxes Xeikon (Million)

     €           6.60

     €     6.60

     €      6.60

     €      6.60

    Value of Deferred Taxes Per Xeikon Share

    €           0.26

    €     0.26

    €      0.26

    €      0.26

     

     

     

     

     

    Value Accentis - (5)

     

     

     

     

    Value Accentis for Xeikon

     €           5.55

     €     5.55

     €      5.55

     €      5.55

    Value Accentis Per Share of Xeikon

     €           0.22

     €     0.22

     €      0.22

     €      0.22

     

     

     

     

     

    IV Xeikon Per Share Based On Multiple Used

     €           2.10

     €     3.56

     €      5.03

     €      6.49

     

     

     

     

     

    Valuing Punch International

     

     

     

     

    # Shares Outstanding Punch International (Million)

                11.90

          11.90

           11.90

           11.90

    Multiple Used For Xeikon - (2)

                    2.5

             5.0

              7.5

             10.0

    IV Xeikon Per Share Based On Multiple Used

     €           2.10

     €     3.56

     €      5.03

     €      6.49

    IV Market Cap Xeikon (Million)

     €         53.75

     €   91.25

     €  128.75

     €  166.25

    Punch ownership of Xeikon

    72.23%

    72.23%

    72.23%

    72.23%

    Value Xeikon to Punch (Million)

     €         38.83

     €   65.91

     €    93.00

     €  120.09

    Value Xeikon to Punch Per Punch Share

     €           3.26

     €     5.54

     €      7.81

     €    10.09

    Debt Punch to Xeikon Per Punch Share (7 million Euro) – (6)

     €           0.59

     €     0.59

     €      0.59

     €      0.59

    Value Ieper and Accentis (7)

     €           0.14

     €     0.14

     €      0.14

     €      0.14

    IV Punch Based On IV Xeikon Per Punch Share

     €           2.81

     €     5.09

     €      7.36

     €      9.64

     
    Notes regarding valuation:
    (1)   Normalized EBIT: I feel comfortable with €20 million. The company achieved close to those numbers in both 2010 and 2011 all the while it has been in a challenging economic environment with first the credit crisis, then the European sovereign debt crisis, both resulting in a cyclical downturn in printing demand, a wait an see attitude amongst clients and a difficult financing environment. And lastly there was the cyclical downturn for the last year because of DRUPA, as describe above. I think that given the challenges of the last 5 years the €20 million number is conservative in its own right in that we should see an increase in orders for equipment and consumables from DRUPA, increased distribution in the US and Asia, a financing environment that is depressed, etc. In short, not much needs to go right in order for EBIT to start exceeding the projected €20 million. On the other hand, there is a risk on the horizon of a European economy doing even worse than it is doing now. This would have little impact related to their Greek, Spanish, Italian, Portuguese and Irish sales as those countries are already in a state of depression and sales have been depressed for many years in those countries, but the impact from sales to Northern Europe would be impacted. Lastly, don’t forget that 57% of revenues is consumables and service, the segment with the highest profit margins and since equipment lasts between 5 and 10 years it would take some time for that to roll off.
    (2)   Multiples: The multiples are what drives the difference in valuation between the different scenarios listed above.
    In scenario 1 I use a 2.5 times multiple to show how cheap the embedded multiple of Xeikon per Punch International share is at this time. Actually at today’s price for Punch International of €2.55, the embedded multiple for Xeikon is 2.21.
    In scenario 2 I use a multiple of 5 in order to show how cheap Xeikon itself is at this time. At the current price of €2.95 per Xeikon share, the current embedded multiple is 3.95.
    For scenario 3 and 4 I used what I think should be a fair conservative multiple for Xeikon, being between 7.5 and 10 times. Using a 7.5 multiple for Xeikon, one gets an IV of €5.03 for Xeikon and €7.36 for Punch International. If one uses a 10 multiple for Xeikon, one gets an IV of €6.49 for Xeikon and €9.64 for Punch International. Currently Xeikon trades for €2.95 per share and Punch International for € 2.55 per share.
    (3)   Adjusted Net Debt Xeikon: Above I already discussed this issue in more detail. The €7 million due Xeikon from Punch International and the €26.6 million due Xeikon from Accentis are real assets. In case both receivables/loans would be paid back tomorrow, there would be an additional €33.6 million in cash on the balance sheet. I do believe there is minimal risk to Xeikon regarding the €7 million due from Punch International. And regarding the €26.6 million due from Accentis it is difficult to see how that value will end up impaired over time. The haircuts needed on Accentis assets is just massive for Xeikon to lose the €26.6 million in asset value.
    (4)   Deferred Tax Assets: Xeikon has net tax deferred assets of €6.6 million or €0.26 per share. Deferred tax assets of €9.964 million and deferred tax liabilities of €3.363 million.
    (5)    

    Value Accentis % of Xeikon

     

    # Shares Outstanding (million)

                1,270

    Price

     €           0.01

    Market Cap (Million)

     €         12.70

    Ownership Xeikon

    43.74%

    Current Value Accentis to Xeikon (Millions)

     €           5.55

    # Shares Outstanding Xeikon (Millions)

                25.60

    Current Value Accentis to Xeikon Per Share

     €           0.22

    (6)   €7 million Loan From Xeikon: Punch International owes €7 million or €0.59 per Punch International to Xeikon, which we deduct from the IV of Punch International.
    (7)   Other Assets Punch International: Punch International already has signed contract for the sale of the last office spaces on its books. It is also actively in the process of selling its 4% interest in Accentis and it is due a payment of about €1 million in 2012 from Accentis. This puts the total cash coming in during 2012 at about €2.6 million. I deducted €1 million of that number in order to be conservative. Per Punch International share that is a value of €0.14 per share.
     
    Risks:
    • ·1% guarantee Punch International to Accentis: Punch International guarantees €100 million in secured debt for Accentis. That would require a write down of €42.2 in Accentis equity value and €26.6 million in the loan from Xeikon to Accentis. A €100 million valuation of the Accentis real estate portfolio represents a 13.7% unlevered cap rate. I can’t imagine certain parties not being interested in this portfolio for this price. Btw. a 13.7% unlevered cap rate with a 50% LTV results in a pre tax return of 20.2%.
    • ·The economy, especially the European one, as was discussed prior.
    • ·The Prepress business going away: Well I think it is going away over time. But as discussed above, while it does provide some profit, the margin and EBIT contribution is small. The Xeikon story is about the digital market.
    • ·The Xeikon digital technology: As we have seen, the Prepress/Basysprint business is under a lot of pressure. Is this likely to happen to the digital business? I believe this not to be the case. These digital printers are high end. Xeikon improves the technology each year regarding cost of use, speed, quality, etc. The digital equipment is much more complex than the prepress equipment. It is not just the equipment, but also the toner requires constant improvement and is an integral part of the printing offering.
    • ·The Accentis equity value going to zero, which I think is a possibility, and the €26.6 million loan to Accentis being a total loss to Xeikon, which I think is highly unlikely. Below is the impact on the Xeikon and Punch International IV in case one (the Accentis equity value) or both (the Accentis equity value and the €26.6 million) go to zero.

     

    Scenario 1

    Scenario 2

    Scenario 3

    Scenario 4

    Accentis Equity Value Goes To Zero New Xeikon IV

     €        1.88

     €     3.35

     €      4.81

     €      6.28

    Accentis Equity Value Goes To Zero New Punch IV

     €        2.48

     €     4.75

     €      7.03

     €      9.30

     

     

     

     

     

    Accentis Equity Value and 26.6 MM Loan Goes To Zero New Xeikon IV

     €        0.84

     €     2.31

     €      3.77

     €      5.24

    Accentis Equity Value and 26.6 MM Loan Goes To Zero New Punch IV

     €        0.86

     €     3.14

     €      5.41

     €      7.69

    • ·Management doing stupid stuff: Could happen. I am worried that they will continue to try to “fix” the prepress business over the long-term. On the other hand, the large shareholders of Punch International have their own money invested and are rational entrepreneurial investors. I doubt they will sit by idle.
    Conclusion:
    I believe both companies to be cheap. At today’s price of €2.55 for Punch International the embedded multiple for Xeikon is 2.21. And at today’s price for Xeikon, today’s embedded multiple is 3.95. In valuing Xeikon and Punch International, I believe I used conservative multiples that are reasonably conservative. For one, I believe Xeikon would be worth the 10 times multiple I used or even more.
    On the other hand, one must admit there is a fair amount of uncertainty, like the outcome on Accentis and the Xeikon operating environment. Still I think the current valuation compensates for this risk.

    Catalyst

    1. An improvement of the Xeikon operating environment resulting in higher normalized EBIT.
    2. A sale of Xeikon to a larger player. I don’t doubt at all that a large player with an much larger distribution network and the ability to finance would be able to increase sales and EBIT markedly over the €20 million in normalized EBIT I used prior.
    3. A spin off of the Xeikon shares held by Punch International to Punch International shareholders. First they will need to take care of that €7 million loan due to Xeikon.
    4. An increase in the multiple of Xeikon which would have a leveraged effect on Punch International.
    5. For 2012, the Punch International financial statements will basically be a consolidation of Xeikon resulting is a clearer overview of what Punch International will be worth.
    6. Accentis being refinanced and stabilized completely taking away uncertainty around the €26.6 million loan due to Xeikon. This would also provide for upside to Xeikon for the equity it owns. Actually even better would be if Accentis or its assets would be sold resulting in less risk to or even a repayment of the €26.6 million to Xeikon and maybe some upside on the equity ownership. I do think Accentis drives uncertainty around the Xeikon stock.
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