Jenny Ruth: Vertex working hard on growth

COMMENT


These days, Vertex managing director Paddy Boyle has a much quieter life than when the plastic packaging company first listed in July 2002.

It helps that after falling foul of the regulatory authorities and shareholders through having made inflated financial forecasts in the prospectus, the company is now ultra-conservative in issuing forecasts.

With its last two results, it has signalled the likely outcome and then just over-delivered. And both forecasts were made after each reporting period had ended, giving a high certainty to the outcome.

In the second case, Vertex delivered a 15.8 per cent rise in first-half net profit to $2.512 million after saying a month before it expected the result would be between $2.4 million and $2.5 million.

Similarly, in May the company reported a net profit of just over $5 million after warning the market a month earlier to expect a result between $4.8 million and $5 million.

It is shy of making a forecast for the latest full year, other than to say that, because of the impact of rising oil prices and the high dollar, it doesn't think the annual result will be significantly different from last year. In other words, it expects a poor second-half result.

There was certainly room for improvement. The prospectus forecast that earnings before interest and tax (ebit) for the year to March 2003 would be $11.2 million.

Just 9 1/2 weeks after listing, the company downgraded this by 10 per cent to $10.1 million. In March 2003, it downgraded the forecast again to between $9.2 million and $9.6 million.

In the event, ebit before write-offs came in at $8.96 million and, after the write-offs, it was just $5.54 million.

Boyle said George Gould, who bought an almost 20 per cent stake in the company in March, "encouraged a lot of write-downs of anything which looked at all doubtful. A number of risks were cut back. I don't classify that as a downgrade. That was an accounting treatment".

He also regards the market reaction to the first downgrade, which sent the shares plummeting to below $1.20 compared with the $2.05 issue price, as "out of proportion" to the degree of the downgrade.

Being on record as having not believed the prospectus forecasts in the first place, I would tend to agree with him.

Stripping the historical financial performance down to something resembling the company's underlying performance, the $11.2 million ebit forecast would have meant at least a 25.5 per cent increase on a year earlier for a company which had a record of producing ebit declines in three of the four previous years.

But the downgrade did rub salt into the wound after Australia-based Pacific Equity Partners waltzed off with $60 million of the float proceeds for a stake in Vertex it had held for less than two years and for which it had paid $12.8 million.

The share price has never recovered to the float price and has been languishing lately, closing two cents down yesterday at $1.53, no doubt because of the difficult outlook.

But the company is in much better financial shape now than when it listed, partly thanks to Gould's write-offs and partly because of improvements in the underlying performance.

That is despite Gould having sold out again in September and the company gaining its third chairman in its short life as a public company.

The latest result shows Vertex's debt-to-equity ratio has dropped from nearly 200 per cent at the end of September last year to just under 133 per cent.

Its long-term debt has dropped from $28.6 million in September last year to $19 million, and short-term debt has fallen from $4.7 million to $4.6 million.

And the result itself looks respectable when you consider the environment in which it is operating.

About 24 per cent of Vertex's sales, $45.3 million in the latest half-year, are overseas and about 15 per cent are to Australia, so the kiwi dollar's rise certainly hurts it. Boyle says there's also a secondary impact in that some of its customers are also exporters.

The high dollar has also helped it with the cost of raw materials but, even so, the rising price of oil, from which most plastics are made, has sent the company's raw materials costs up between 40 and 60 per cent.

The company's second-half expectations are based on this state of affairs continuing.

It isn't the only company hurting. One of its competitors, Australia-based Plaspack, said this week these same forces and its inability to increase its prices would mean its operating earnings for the six months to December would be down about 30 per cent.

Certainly, analysts value Vertex above the present share price, despite these difficulties. John Cairns at Forsyth Barr values the shares at $1.72 and Selwyn Blinkhorne at ABN Amro Craigs at $1.68.

Vertex's commentary on its latest results highlights its "case-ready" meat packaging operations, which deliver to supermarkets ready-packed, retail-sized meat packs with more than double the shelf life of traditional packs.

Boyle had commented in the annual report about "a justifiably high level of caution surrounding food handling" as far as market acceptance of the case-ready technology went.

But now the company has signed its second Australian customer and expects to see significant volumes of packed meat in Australian retail outlets early next year.

"Supermarkets are conservative organisations in adopting new technology," he said. "They need to be assured that it's going to increase sales and profit."

The new Australian customer, who can't be named yet, is a meat processor who will be selling to some of the roughly 900 independent supermarkets in Australia.

Part of the reason Vertex didn't meet its prospectus forecast was the slower acceptance of the case-ready technology than it had hoped for and because of poor results from its "technical injection" division. Both these divisions had been flagged in the prospectus as providing the company's growth opportunities.

The technical injection division produces customised injection-moulded products for the agritech and medical markets, including animal identification tags, controlled drug release capsules for animal remedies and silicon parts for human health applications such as sleep apnoea treatment systems.

Boyle says the division is steadily increasing sales and its results are much better after he personally became involved in its management.

Another potential growth area, although commercially insignificant now, is its move to using "bio-polymers," or plastics made from plants instead of petroleum.

The big problem with bio-polymers is that they cost much more than petroleum-based plastics.

Boyle says Vertex sources its raw material, a substance called PLA, from a factory in Nebraska which has only a 150,000 tonne capacity and hasn't yet reached that capacity.

That's small in terms of the industry and the company also has its development costs to recover.

But the rising oil price is making PLA more cost-competitive: from costing between 50 and 60 per cent more than petroleum-based plastics, it is now down to about 30 per cent more.

And despite the premium price, it is gaining customers.

Boyle says: "Ultimately we must stop taking our raw material out of the ground and grow it."

Vertex

Managing director: Paddy Boyle.

Revenue: $45.3 million in the six months ended September v $42.7 million in the first-half last year.

NPAT: $2.512 million in the six months ended September vs $2.17 million in the first-half last year.

Market capitalisation: $49 million.

Vertex was founded in 1941 and then became part of Carter Holt Harvey, which sold it in a management buyout backed by Australia's Private Equity Partners in October 2000. The company makes a wide range of plastic packaging from meat and other food trays to dairy packaging, household products, industrial and agri-chemical containers.