Communisis - Speculating on Delivery

http://www.communisis.com/

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Communisis (LSE:CMS) is a business support services company that recently re-entered the FTSE All Share and Smallcap indexes. Communisis has been on a run of good form since 2010 with the shares up over 300% from the lows following the market recovery and introduction of a new CEO Andy Blundell who took the helm in October 2009. The company has been successfully modernising it's activities to meet changing market trends primarily through pursuing a digitally driven strategy that has seen it's presence as a UK marketing services provider (MSP) re-strengthen. Communisis currently trades at 53.25p/share amounting to a circa £102m market cap through having 191m shares in issue.


The technical position for Communisis(CMS) shares is good with the company currently within a strong upward trend that has been in place for a year. The overall momentum is still upwards despite a recent loss of momentum as illustrated by the 50-day moving average. Importantly, the shares are above the psychologically important 50p level so this should continue to act as strong support in the near future. However, below this level, due to the fast paced nature of the rise, there is little support until 40p. As it stands, barring a reversal to the downside, the shares look to test 60p as a first target with as high as 75p before year-end.

Directors shareholdings for Communisis are modest with recent transactions involving the grant of shares under a long-term incentive plan (LTIP) and sales of shares to cater for covering NI and tax liabilities. Chairman Peter Hickson has the largest holding of 1.36m shares which is currently worth £725k. Institutions are heavily involved with Communisis shares with Henderson Global Investors alone holding ~23% of the total shares issued. Gartmore Investment and Standard Life are examples of other main shareholders. The institutional holdings are still undergoing change following the shift of indexes that Communisis has undergone. This is because some funds have rules regarding what types of shares they can and cannot hold. Furthermore, tracker funds that try to replicate a particular index would need to buy/sell Communisis when it changes index in order to match appropriately.

Courtesy of Communisis 2012 Annual Report
Communisis' business model revolves around designing, producing and distributing customer communications such as direct mail and dealing with security print for near-money documents. This is historically been in paper format for Communisis, but the shift into digital has meant that the company has had to innovate to stay afloat. This has involved reducing dependence upon declining services such as cheque manufacturing. A selection of the Communisis' operational facts are as follows;
- Works will the top 10 building societies in Britain
- Bought 900m envelopes on behalf of clients in 2012
- Sent 25m emails on behalf of clients in 2012
The result is that CMS is a company is fairly straightforward in basic structure, yet it completes a  diverse set of tasks and services on behalf of its clients. The company has two main divisions; Intelligence-driven communications (IDC) and Specialist production and sourcing (SPS). SPS is the capital heavy division that deals with production and distribution whereas IDC is the "front-end" of the business. SPS generates the majority of the group's total revenue.

However, in the past CMS has struggled with global diversity. It remains a fact that 93% of the company's revenues are derived from the UK and this has deterred investors considering the generally weak UK markets. To counter this, CEO Andy Blundell intends to continue overseas expansion, particularly in continental Europe where the company is coupled with a global FCMG (fast moving consumer goods) client. The company has also benefited from the signing of longer-term contracts. This has been achieved through improving confidence in CMS and approval of their services. This is beneficial considering longer-term contracts are often not as tightly volume linked and actually attract higher margins. Communisis has ambitious targets to derive 20% of revenues from non-UK sources, plus see margins grow to at least 10% over the next three years. Considering this is likely to be achieved through expansion, there is significant potential for these previously untapped markets to be continually exploited using the acceptance that was gained in the domestic market as "a signature of approval". The company is also diversifying away from being too reliant on the financial services sector. previously the sector amounted to over half the group's revenues but this has been brought down over the last couple of years.

Regarding this, in recent months CMS has benefited from a series of contract wins with major UK businesses. Since the start of 2011 the group secured a 9-year contract with Nationwide and 3-year contracts with both Yorkshire Building Society and Thames Water. The company prides itself on maintaining a good client partnership primarily through its services hence it is no surprise that recurring revenues are decent with a financial services partner renewing it's contract with the group in March. Perhaps the most material negative is that some of the legacy products and services are not being renewed hence stunting revenue growth, but this is all part of a phasing out approach. In late 2012 the company also was pleased to win a contract with telecoms giant BT.

CEO Blundell commented on the Nationwide contract: "Communisis enters 2013 with a strong pipeline and new revenues from recently announced contracts. The latest Nationwide contract is a landmark business win for Communisis given its scale, duration and span of service delivery. It is one that reflects the depth of our trusted partnership and is further evidence that access to our market-leading investment in high-speed colour digital technology is very attractive to clients as they outsource more of their customer communication requirements."

One of the main approaches that Communisis has taken to complete the turnaround is to acquire small, cash generative businesses in order to form synergies. In 2012 alone CMS acquired three firms that matches this specification; Kieon, Yomego and a 49% stake in The Garden Marketing Limited. These combined with the major contracts should help boost expected revenues and financial results for 2013.

One significant issue that still remains a problem for CMS is its legacy pension deficit. The IAS19 pension deficit stood at £21.7m as of December 2012 although this issue is being addressed (with the contribution fixed until 2015) as noted in their financial report: Asset-backed, prepaid contribution reduces the pension deficit by £9.8m, limiting additional cash contributions to £1.15m p.a. until at least the beginning of 2015.  The other issue surrounding CMS was the debt pile which stood at £24.7m for FY 2011. Positively, numerous broker expectations (which saw debt in line with 2012's figures) were beaten with the debt pile down to £20m at FY 2012. Indeed, looking back at previous broker notes, Communisis has been unexpectedly resilient in its recovery although the company did miss analyst's 2012 forecast margin increase by 0.1%.

It's worth looking at the FY 2012 Preliminary Results and following Interim Management Statement (IMS) to gauge the current direction of the stock. In addition to the financial details listed above were the following points of interest:

- Operating margin increased to 6.5%
- Post-tax profit rose 27% to £5.2m
- Full-year dividend up 10% to 1.65p/share
- Free cash flow improved to £6.6m from £2.9m

Also included was a reflection on a placing that Communisis undertook in February 2013. The placing was for 37.5m shares under a firm placing and a further 12.5m shares under an open offer scheme. The placing would raise £18.9m net of expenses. The company noted that the firm placing was substantially oversubscribed - a positive sign that retail investors maintain interest in the stock going forward. Panmure Gordon also recently issued a hefty target upgrade in May from 47p to 68p - a move that iterates the confidence that Panmure have in the positive momentum carrying forward.

CMS delivered over 25m emails in 2012

Furthermore, the IMS confirmed that results would be in-line with management's expectations. Within it CMS wrote: "The Group's broad range of services continues to gain traction in the UK market and several of the most recently secured contracts, especially in the transactional sector, are being successfully implemented. The international business is also expanding, particularly in the FMCG sector, where there is good long-term potential for growth." An interesting turning point has been outlined in calendars for August 1st - the half-year results plus a progress report will be released.

The most recent piece of corporate news was the release of re-structuring plans. As part of the plans, cheque production at Manchester would cease at the end of the 2013 calendar year and be transferred to Leeds. The restructuring is set to cost £3.5m of which £2.8m is set for H2 2013 and will provide £4m in annualised cost savings. This charge will impact upon H2 results, but should not on the H1 results due in August. "These plans are aligned with the Group's strategy to reduce its exposure to the more commoditised sector of the print market by focusing on higher margin specialist production and to improve margins by reducing costs and improving capacity utilisation."

The ultimate question is whether Communisis has topped out or is only part the way up it's bullish trend cycle. In one light, the shares are up massively on a multi-year basis and the current PE ratio around 10 does not look particularly cheap (considering rival St Ives also has a modest 12.7 PE ratio) albeit it lies below the support service sector average. Despite this, I am impressed by the progress of the board of directors and having a successful management is of utmost importance when analysing a company for the future. CMS have proven they are capable of winning contracts with various industry majors that will only help their cause and the revenue impact of these will be focused upon in the half-year report. The two major risks in the form of the pension deficit and debt pile are being addressed which is comforting as well. The plan to pursue higher margin growth and grow into foreign markets whilst building on their domestic presence promises to help increase profits rapidly and realistically both objectives should be achievable. Therefore, although the current valuation may be stretched, the current share price is attributing little value to future contracts and any catalysts. These could include further acquisitions using the placing money or confirmation of a reduced debt pile. With dividend growth among the strongest in the sector, and plenty of potential upside, Communisis is worthy of a personal Buy tag for my Review results page.


Video by Communisis PLC

UPDATE 01/08/13: After just one month the shares have risen 26.8% higher to 67.50p after the company announced a 'huge' contract with Lloyds Banking Group. Whilst this is clearly positive, their H2 results will be impacted by £12.5m+ of CAPEX due to this so I have moved them from buy to neutral

8 comments:

  1. Never heard of them until now but seem tobe rapidly expanding with a golden divi.

    thanks, CraigJ

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  2. keep up the good work elite!

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  3. A succint summary, thanks for sharing.

    CMS seem to be hitting all the right notes at the moment, and it looks like they are in the right place to keep doing so for a while yet. The Nationwide contract is a huge win, as is the BT on in December.

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    1. And the Lloyds contract is in another league

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  4. El1te do you see a bigger rise coming after this contract win? You said a 75p target by end of the year, looks set to smash that soon. Or is it time to get out and buy back on weakness? Good call btw! Thanks

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  5. Difficult to call without knowing the details of the contract. Really depends on your own situation. I would not be selling yet but if you want to be safe you could always top-slice and dispose of half of your initial investment. In the RNS the wording does imply that the contract has the ability to be worth a lot in revenues to the company. The strong run-up into the close yesterday is also positive. Might just have to shift that 75p target up to as high as 100p dependent on the next set of financial results

    Good Luck whatever you decide. At the end of the day you should never be ashamed of taking a profit if it's right for you.

    El1te

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    1. I got out at 23% profit! Amazing article and research thanks for all the work you put into the site.

      Keep the tips coming! I've only just got into investing last year and love AIM because of the risk/reward of it all. Your website really helps back up my own research and your intro to TA posts recently are awesome for newbies like me.

      Thanks again.

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  6. Well done! I'll hold out for a bit longer with CMS (might wait for their results) and then re-evaluate the situation. Thanks for the good comments, much appreciated.

    El1te

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