Well equipped

Wyndeham Press Group (WDSW) is one of the UK's largest and best-equipped specialist printers. The group was formed in 1991, and has since expanded through a series of acquisitions and organic growth. The company's earnings have suffered in recent years due to increasing competition from Europe and domestically, as well as depressed market conditions. However following the completion of a major capital investment programme, a further acquisition, and several contract wins, we believe WDSW is firmly on the path towards restoring earnings growth.

The company, which employs around 1800 people in the UK, operates a comprehensive array of printing services though three divisions, Magazines, Commercial, and Direct Mail. The Magazine business is one of the leading printers of quality, time sensitive magazines in the UK, and prints more than 650 titles per month. The Commercial Division provides a wide range of printed products (such as catalogues, brochures, and labels) for government agencies, retailers and the automobile, transport and travel sectors. The Direct Mail division was formed to capitalise on a major area of growth in the advertising sector, and produces stationery for advertising companies, direct marketing organisations, as well as public and private utilities.

WDSW's share price was a star performer during the 1990's rising around thirteen-fold in value. However as is often the case with market favourites, out-performance never lasts indefinitely and soaring prices were followed by a deep correction. From an all time high of 350p in 1999, a severe bear market saw prices plummet by 77 percent to a low of just 80p as the advertising sector entered a cyclical trough. Although prices have since rebounded off their lows, WDSW remains a long way below levels seen at the peak.

In recent years Wyndeham has fallen victim to a cruel printing market, which has been suffering from a sharp downturn in advertising, significant oversupply and aggressive price competition. This culminated in a profit warning last November as the company lost several substantial contracts in the direct mail and commercial divisions. However despite no immediate evidence of a market recovery in print media, we believe that Wyndeham's medium-term earnings prospects have improved significantly in recent months.

In March the company acquired Graphic Facilities, a specialist printing group, for up to £5.9 million comprising £1.9 million in cash and the balance in shares. We believe the opportunistic deal was sensible, with WDSW seizing upon a downturn on the industry to make a value-adding acquisition at a reasonable price. The purchase has been completed for around 5 times pre-tax earnings, with Graphic having annual turnover of around £15.7 million, and net assets of £2.2 million. The addition of Graphic's complements WDSW's existing pre-press business, and creates the UK's largest specialist pre-press operation. Graphics has a leading-edge digital capability, an increasingly important service for clients, which reinforces Wyndeham's position as the market leader in innovation.

We were further encouraged by management's February announcement that Wyndeham had secured a three-year pre-press contract with IPC Media, which is expected to generate £1 million in sales annually. This follows several other new contract wins in the second half of the financial year, including five titles for Reed Business Information. We are highly encouraged that with only a muted improvement in the trading environment, WDSW have managed to more than replace lost business and increase market share.

Fat Prophets are pleased that faced with a difficult external environment, management have made concerted efforts to focus on cost control, and exploit potential operational synergies. Wyndeham embarked on a rationalisation programme in January and we are encouraged by management's recent indications that issues with underperforming businesses have been addressed. The company also reports solid progress in the implementation of a centralised sales team, and we expect further bottom line benefits in 2004 as management strive to share internal resources more effectively.

Wyndeham's commitment to a high level of investment in innovation will deliver significant earnings gains over time in our opinion. The company has spent over £66 million on new equipment in the past five years, and is at the forefront of available technology. We expect WDSW's technological edge to underpin the printer's efforts to claim market share, and allow significant exposure to the eventual upside in trading conditions.

We are particularly impressed that the company has been able to respond effectively to difficult trading conditions in the last year whilst maintaining balance sheet strength. Wyndeham had net debt of £36.6 million at the 30 September 2003, and gearing of around 74 percent. The group has strong free cash flows of around £5 million annually and interest cover of almost 2 times. The acquisition of Graphic was funded by a £4 million placement at 110p and will provide the Group with additional working capital of around £600,000. We expect balance sheet strength to improve further over the coming year as restructuring benefits and new contract wins begin to flow through to the bottom line and cash flow performance.

Fat Prophets believe that the initiatives taken by management have established a sound basis for further earnings growth, and leverage WDSW's profitability to the eventual recovery in the broader advertising market. The company's cost base has been rationalised, underperforming businesses have been addressed and significant investments have been made in technology. The benefits of these actions are already starting to boost earnings (in a weak market) following the recent number of successful contract wins. Wyndeham currently trades on a forward price earnings multiple of around 10 times which we believe is fairly conservative when compared to larger competitor St Ives which trades on a multiple of around 15 times. WDSW also offers a reasonable yield of 3.5 percent and trades at just 1.5 times Net Tangible Asset Value.

From a charting perspective WDSW has occupied a trading range over the past two and a half years between 80p and 155p. Trading ranges are essentially holding patterns that form when a stock is not under the influence of a dominant trend. In the case of WDSW, we believe the range will ultimately provide a solid base from which high levels are achievable.

In recent months WDSW has rallied off the lower end of the range and we believe that a lasting turnaround is now underway following the recent positive trading update. Our initial target is for a move back towards the upper end of the range, however over time, we believe that higher levels are achievable. Over the short term, we believe that the shares should find support at 110p. Accordingly we recommend WDSW as a Buy to Members up to 114p.