Description

Company: Punch International.
Ticker: PUN
Stock Exchange: Brussels

Market cap: 190 million euro

Why do I like the company?
It is cheap. With the stock currently at about €88 it trades at 1.15x book value. Book value (as of mid-year 2006) was €76 but this is widely understated as the company's real estate is on its books for €83 million but its true market value is estimated to be above €165 million.

First normal question would be: why doesn’t management re-asses the value of the real estate? Since 2003 Belgian law states that if you want to re-asses your real estate you should do this on a yearly basis. Since this would be very costly as official estimates would have to be paid for, Punch does not do this. Punch prefers to work with real estate broker estimates but without officially raising its real estate calculations on its books.

Apart from that the company recently partially spun-off some of its units and keeps them on the balance sheet at book value rather than at market value.

Now, this was to peak your interest: What does Punch do?

Punch is a holding company listed in Belgium which is active in various areas where it feels it can be a top-3 player worldwide. Its CEO is one of the smartest and deal-savvy persons I know and on June 28^th bought back even more shares on the open market (even though he already controls 38% of the company). He bought back shares at €80. There is no option dilution because Punch does not hand out options.

Punch is divided in:

It is not often that you find a growing company, top-notch management that is heavily invested in its own stock (38% insider ownership) and that trades at 1.15x book value!

The reason why 3 out of 5 Punch entities are partially listed is to show to the market that the Sum Of the Parts is severely undervalued and to unlock some value without giving up complete control.

If we adjust Punch’s book value for its main other publicly listed entities

- Punch Graphix and take PGX's market value (128pence)

- Punch Technix- we take at market value 10 euro

- Punch Telematix – we take at market value of 13.15 euro

 We arrive at an adjusted value of €109 or about 23% above the current stock price.

(for simplicity we even ignored value of Punch Motive and Punch Property)

First Half 2006 Numbers came out 29^th of August 2006.

Before we layout the numbers we have to emphasize that y-o-y comparisons for Punch are made difficult by the many acquisitions, divestitures and spin-offs the company realized in 2005. Last year Punch spun-off Punch Graphix to be listed on the London AIM exchange which gave a big boost to '05 numbers. That's why the headline “Punch earnings down by 64%” as published by many newspapers was wrong and deceiving.

-Recurring EBITDA increased from €13 to €26 million.
-Recurring EBIT increased 25% from €14 to €17.6 million.
-Tax rate was high (39%) vs. last year's 10% but this was due to IFRS accounting and not actual taxes paid. Going forward it will be difficult to estimate the tax rate Punch will have to pay because it still has a lot of deferred tax assets (DTA) to be taken up.
-Fixed assets increased 21% (partly due to acquired buildings of ZF in recent ZF acquisition)
-Stated Book value increased to €76 which is an increase of 7% over 31st of December 2005.

Investor Day

I recently attended Punch Investor day in Lier, Belgium and here are my notes and thoughts:

Punch's Investor Day started with an overview of the company and its overall goal. Punch strives to convert innovative technology to profits. “No technology because we 'have to', only if it is profitable”.

Since coming to the market in 1999 Punch has done a series of acquisitions and divestitures. In all of this M&A activity there is one common denominator: the search for fallen angels. Management is on the look out for companies that were pioneers in their field but either lacked the management or the capital to increase their activities further and went downhill from there. The best example is probably Xeikon which was publicly listed in Belgium and currently belongs to the Punch Graphix group. Xeikon was hailed as a very technologically advanced digital printing company but eventually went bankrupt because of serious mismanagement. There was clearly nothing wrong with Xeikon products as they are currently generating good results.

Important to note: The CEO is a true “cheap-skate” and is very conservative with his acquisitions. The company pays very little or no goodwill and in fact has been able to sometimes get “badwill” as the CEO likes to call it (basically getting parts for free in an acquisition)

Punch is only interested in investments in a market where it can be a top-3 competitor. They have to be products which are new and innovative but with a proven worldwide customer base.


Punch International: a breakdown by segment

Punch Graphix (listed on London AIM exchange and 59% controlled by Punch Int'l)

This division was listed for 51% on the AIM exchange in London in 2005. While Punch International used to control only 49% up until the beginning of 2007 about two weeks ago the company made an offer to shareholders at 128p (no premium to market price) to regain full control of the board because Guido Dumarey felt that the strategic direction of Punch Graphix could be improved and wanted to consolidate the full results once again.
Punch Graphix develops, manufactures and supplies digital printing and prepress systems for the global graphics industry. It has two main brands: BasysPrint and Xeikon.

Under the Xeikon brand high-end digital colour printing presses and consumables for the commercial printing and industrial printing market are developed by a team of engineers.
We got a tour of the Punch Graphix plant in Lier, Belgium and were impressed by the new Xeikon 6000 machine which was just launched last week and is truly best in-class. Punch Graphix has high hopes for this machine and confirmed it had sold its first units. In the digital colour printing equipment market Punch Graphix has about a 33% market share behind HP-Indigo which has 56% market share.

BasysPrint offers prepress solutions and offers prepress equipment and related software for offset printing and the commercial/newspaper sector.

Punch Graphix reported a strong set of first half 2006 results. Sales increased by 7% to 84M and pre-tax profit was up 13% vs. the same period last year. For the full year we expect about 170M in revenue and EPS of 0.15. Punch Graphix stock currently trades at 12x 2006 estimated earnings. If we compare this to its main competitors (Domino Printing & Xsar) who trade at 16x estimates we can safely say Punch Graphix is undervalued.


Punch Technix (listed in Amsterdam and 60% controlled by Punch International)

Punch Technix is active in the fitness, medical and graphics industry as well as milking robots for cows. In this last segment Punch Technix is the number 3 worldwide after Lely & DeLaval. Punch Technix is the only one with a MultiBox system which is suited for farms with more than 150 cows. This is the least attractive business of Punch's holding and it is a tiny company. It is probably the least attractive of all the business units.

We wouldn’t be surprised to see some ‘action’ in this segment (action meaning a sale of the business or Punch Technix management that does an MBO)

Punch Telematix (70% owned by Punch International, listed on Euronext Brussels)
Punch Telematix focuses on being the preferred total solutions provider in Mobile Resource & Asset Management, offering best of breed technology and the highest value for money to customers and partners.
The group sells portable device solutions as well as vehicle mounted solutions. One application is the tracking of a large fleet of cars/trucks by the parent company so it can see where they are at any time of the day. Punch Telematix offers the hardware & installation, airtime, backoffice software and repair services. All this is bundled in a sale with a fixed monthly fee for maintenance and repair.

Punch sees a lot of potential in the market and is growing quickly. The problem (which at he same time is the opportunity) is that until now it has only had sales in Benelux while its main competitors are able to sell in Europe. Punch described its competitors as Transics and MinorPlanet, along with some other small companies

We recently attended the IPO presentation of Punch Telematix and were very impressed with the potential and management. The CEO, Luk Lammens, comes from Proximus (Belgian's largest mobile company, belongs to Belgacom) where he pioneered mobile telephones in Belgium. Punch Telematix came to the market at 13 euro’s and currently trades at little higher at around 13.6. We will get first results of Punch Telematix at the end of February 2007. In the first week of 2007 we had a meeting with CEO Luk Lammens and have high confidence results won’t disappoint.

Punch Motive (100% owned by Punch International)

Punch Motive is the newest venture in the Punch family. The overall goal is to develop a best-in-class hybrid engine. The recent acquisition of ZF in Sint-Truiden, Belgium which makes CVT transmissions was an important step towards this goal. Punch Motive is currently in co-development with Hyundai to rigorously test the engines and by March 2007 there should be more news on this front.

Currently the hybrid engine market is dominated by JATCO (80% controlled by Nissan and 20% controlled by Mitsubishi), AISIN is the world's second largest and is controlled by Toyota. Mercedes and VW/Audi have similar technology but for their internal use only.

Punch Powertrain (as Punch calls its hybrid engine) is the newcomer in the market but its development has been fully funded by Hyundai so this takes a part of the risk out of the equation. Punch confirmed that its hybrid engines are currently installed in Hyundai cars and are being tested in Korea.
During its presentation Punch projected a graph in which it shows the expected growth in demand for hybrid engines by several third party sources. The market is expected to grow around 80% from 245.000 in 2004 to 1 million hybrid engines in 2010. Several research firms are actually more optimistic and vary between 2.5 and 3.5 million engines in 3-4 years time.

Punch Other (mainly consisting of Punch's real estate assets)
Punch's real estate value is significant. Punch showed a slide in its presentation highlighting its entire real estate portfolio and how much was on its books (€83M) and what the estimated fair market value was (€165M) or almost double. According to CEO, Guido Dumarey, this provides a nice cushion should things go wrong at some point for Punch International.
While the real-estate assets have accumulated during acquisitions Punch is looking to streamline its real-estate portfolio and has now hired someone to manage its real-estate portfolio. Punch's main real estate assets are in Belgium but it also has some valuable real-estate in Slovakia. This real-estate is valuable because it is close to where carmakers Ford, GM, Kia and Hyundai are expanding their facilities and might need extra space in the future.


Overall Punch management said that there shouldn't be one division that was still loss making by the end of 2006. 

Important shareholders :

CEO Dumarey: 38% of stock

Merrill Lynch Blackrock 9.6%

ZA Capital 3%

 

Catalysts:

Full year 2006 figures due 28^th of February 2007. After consolidation in 2006 and the share price not doing much for most of 2006 I think 2007 and beyond will start a very fruitful and newsflow heavy period for Punch.

All the business divisions have important catalysts ahead of them in 2007. To list just a few:

Punch Graphix will release the results of the Xeikon 6000 machine, which should be very strong

Punch Telematix is at the crux of a very fast growth phase which should propel EPS at 30+% growth rates over the next three years.

Punch Motive should see tangible results from its development deal with Hyundai and announce some results for this program.

Increased volume in the stock should also lead to more interest from brokers to cover the company. Brokers who have analysts who are willing to do the work on Punch should come to the realization that the company is a bargain, in my opinion.

Management has committed to paying a dividend in 2007. We shouldn’t look for a large payout as it is keen on raising its payout every year.

 

Management

I have already described the CEO, Guido Dumarey but an important aspect about his management style is that he requires a 15% minimum ROE or none of the other managers get a bonus. There are no options and virtually all top executives hold shares in the company. CFO Wim Deblauwe (whom we have met on several occasions as well) is a deal-savvy financier who along with the CEO bought shares around €80 last summer. For full profiles interested people can go to http://www.punchinternational.com

Opinion:

I continue to believe that Punch is severely undervalued by the market. Since almost no brokers cover the company many investors are not familiar with the story yet. This creates an opportunity. While Punch might only be listed since 1999 it’s in existence for 23 years and CEO Dumarey has clearly shown he knows how to create shareholder value.

After the IPO of Punch Graphix in 2005, Punch sees 2006 as a transitional year but is confident that it will reach 15% ROE which would mean almost €11 per share in profits.
This number is without the impact of any acquisitions which the company continues to seek.

I believe that the company still offers a lot of upside potential with its current stock price at 1.15x book value and a P/E of less than 11 for 2006. The downside on the stock seems limited.

 

Catalyst

Full year 2006 figures due 28th of February 2007. After consolidation in 2006 and the share price not doing much for most of 2006 I think 2007 and beyond will start a very fruitful and newsflow heavy period for Punch.

All the business divisions have important catalysts ahead of them in 2007. To list just a few:

Punch Graphix will release the results of the Xeikon 6000 machine, which should be very strong

Punch Telematix is at the crux of a very fast growth phase which should propel EPS at 30+% growth rates over the next three years.

Punch Motive should see tangible results from its development deal with Hyundai and announce some results for this program.

Increased volume in the stock should also lead to more interest from brokers to cover the company. Brokers who have analysts who are willing to do the work on Punch should come to the realization that the company is a bargain, in my opinion.

Management has committed to paying a dividend in 2007. We shouldn’t look for a large payout as it is keen on raising its payout every year.