Stock of the Week Paperlinx PPX

Paperlinx (PPX) is a distributor, manufacturer and seller of paper across the world, and has recently emerged as one of the key shares to buy.

PPX’s focus is on high performance packaging paper, including top Australian brand, Reflex. The company’s strategy is to stay in front as a leading local manufacturer of high quality paper, though it is also a renowned global paper distributor and merchant.

In 2000, PPX was separated from Amcor and listed as a separate company. Since then, PPX has made a number of significant purchases, including Spicers paper, The Paper Co and Buhrmann NV.

Deceptively dim Half

In February, PPX reported its financial results for the 31 December half, which included net profit after tax of $35.3 million – an 8% increase on year and in line with guidance. The profit included a one-off cost of $6.4 million before tax arising from restructuring costs of $14.1 million.

Revenue for the period was $3,783 million, which was a slight 4% decrease on the previous corresponding period.

These results were not overwhelmingly positive. However, there is no doubt that PPX’s financial performance has been negatively impacted by the upfront investment made over the past couple of years against the Maryvale pulp mill upgrade and associated projects.

These items are expected to provide substantial benefits into 2009 and beyond, a fact that the market is seeing as a sign of a strong future for PPX.

Tough market

PPX is currently operating in a tough market. Along with many other listed Australian companies, PPX has, in recent times, been hit by a strong Australian dollar, as well as high pulp and fuel costs, which have depressed earnings.

PPX is also battling a global oversupply of paper, yet another tough external condition that is reflected in the company’s 2H results.

These factors saw the company tumbling in 2007, hitting an all-time low in early 2008. However, since the company’s first-half results were revealed, the stock has rebounded spectacularly – illustrating just how important results are when considering which shares to buy.

We are becoming increasingly confident that the next move in interest rates will be down (although not necessarily for some time). This should see the AUDUSD come down in the coming months, which would be good for PPX.

The reason for this is that the market is seeing that, although PPX has experienced some tough times, its future is very promising. The external factors that have impacted the company are not expected to last, and already the company has seen positive pricing changes in continental Europe and Asia.

Strong future

The company has recently completed a number of strategic initiatives that are already delivering significant benefits, including the upgrade of the Maryvale number 1 sack kraft machine, the closure of the Shoalhaven number 1 and 2 paper machines, and the creation of PaperlinX Office and PaperlinX Printing and Publication Papers.

Cost reduction programmes implemented during the last half have included the reduction of shifts on a number of paper machines, and conversion of oil and coal fired power plants to natural gas.

PPX sees future gains as coming from continued improvements in operating efficiencies, cost reductions and product rationalisation, potentially supported by pricing as global capacity utilisation improves.

The upgrade of PPX’s Maryvale pulp mill and its associated projects will provide additional benefits for 2009 and beyond on costs, quality and environmental measures.

After substantial falls during the last few years, PPX has finally been able to move strongly higher and looks poised to continue beyond the $3 level, suggesting that it will be one of the better shares to buy.