PMP shares crashed
almost 35% this morning after a “shock” 15% profit downgrade which
Crikey warned was on the cards in a remarkably perceptive piece from an
“industry insider” that we published on February 17 – just when the
stock hit a five-year high of $2.30.

If we told you that the
country’s major printer had so much business that its profits would
fall because it couldn’t meet demand, you’d think we were mad! And if
we also told you that its distribution arm was losing millions with an
outsourced deal that seemed too good to be true at the time it was
revealed in 2003, and was now a nightmare, you’d wonder if we were
making sense.

Well, that’s the explanation
today from PMP, Australia’s largest contract printer. Despite an
extensive restructuring campaign, the company today revealed a surprise
15% drop in forecast earnings for the 2005 financial year. The new
estimate of $70-$72 million compares with $84 million previously.

PMP
CEO David Kirk is a former New Zealand rugby All Black and captain of
the World Cup winning side back in 1987. His battles at PMP must make
him wish for the relative chaos of the rugby field, as today he
confessed: “PMP is undertaking a major restructuring of the capital
base in the print business. This has reduced capacity more than we
previously expected. We are simply not able to process the volume of
work in the six month period we have previously forecast.”

If
that’s not a “we stuffed up” admission in trying to take excess capital
out of the printing business, we don’t know what is. But wait, there’s
worse. The company can’t take advantage of spot printing work with
higher profit margins because existing low margin magazine and retail
work is taking up too much press capacity. Stuffed if they do, stuffed
if they don’t.

PMP is now looking at spending more money on new
printing equipment in winter to boost capacity for later in the year,
which will probably coincide with a retail/advertising slowdown and a
cut in demand. So after trying to take excess capital out, more money
is going to have to be spent. That’s life in a cyclical business.

And
then there’s the 1st Fleet magazine distribution disaster that PMP’s
Gordon and Gotch subsidiary is running in conjunction with the Network
Services arm of ACP, Kerry Packer’s magazine operation.

“Higher
oil and fuel charges and continued delays and higher costs associated
with implementing the outsourced distribution arrangement in Gordon and
Gotch contributed to the forecast earnings reduction,” PMP said.

PMP
revealed in February that Gordon and Gotch lost $200,000 in the first
half, compared to a $1.5 million profit the previous first half. Now
bigger losses are forecast. Executives from Gordon and Gotch and
Network are working with 1st Fleet to try and make the distribution
deal work and help “cut costs”. After the sharp rise in diesel and
petrol prices these past nine months, that’s going to be some task.

PMP
shares have been weak in the past month and have weakened from a high
of $2.30 in mid-February to yesterday’s close of $1.86. Alas, today’s
bloodbath saw the stock plunge to a low of $1.20, and at 11am it was
53c weaker for the day at a 12-month low of $1.33. Therefore, a company
valued at $550 million yesteday is today only worth $395 million. Check
out the ASX graph of PMP’s recent gyrations here,
although it doesn’t include today’s plunge.

Perpetual
Trustees clearly should have taken more notice of Crikey, as they’ve
been a big buyer in recent months and emerged with a 5% stake in March,
all of which is now heavily underwater. Ouch!

We hate to gloat
but our “well informed print industry insider” predicted most of
today’s developments in this February 17 sealed section piece which
included the following lines:

Is printing giant PMP’s share bubble about to receive a
nasty prick? Printing is PMP’s largest business, and all the
indications are that the already thin profit margins are being
squeezed. A bulging order book from the retail and magazine publishing
sectors has kept volumes high – however the demand for this low margin
business has forced the migration of more profitable commercial work to
PMP’s competitors.

Coupled with the installation costs
associated with the $124 million investment plan, this could seriously
damage the PMP board’s promise to deliver increased profitability and a
return to annual shareholder dividends in the near future.

In
the 2004 Annual Report (which was bound so poorly that many fell apart
in shareholders’ hands), David Kirk wrote “We expect to be judged on
results”. Let’s hope history judges him better than his predecessors
Ken Catlow or Bob Muscat.

You can read the full piece on the site here.

Check
it out, as never before have we published such price-sensitive
information. We thought predicting News Corp’s exit from the ASX
indices last year was hot and confirmation of the news did cause a 5
per cent share price fall. But investors who got out of PMP after
reading Crikey’s February 17 piece have saved themselves losses of more
than 40 per cent.

Get more Crikey, for less

It’s more than a newsletter. It’s where readers expect more – fearless journalism from a truly independent perspective. We don’t pander to anyone’s party biases. We question everything, explore the uncomfortable and dig deeper.

Join us this week for 50% off a year of Crikey.

Peter Fray
Peter Fray
Editor-in-chief of Crikey
50% off