Award Winner

Fulmar (FMR) is a leading printer of high quality commercial material, annual reports, marketing brochures and books. The company has invested significantly in innovation over recent years and today has one of the most modern and well-equipped production houses in Europe. Management have also rationalised parts of the business this year, and as a result we believe that FMR is strongly leveraged to a recovery in the commercial print industry.

Fulmar was founded in 1971, and has since expanded through a series of acquisitions and organic growth. Today the commercial and financial printing business accounts for around 70 percent of group revenue, while book production makes up the remainder. Fulmar's earnings have however suffered in recent years due to significant overcapacity and aggressive price competition in the printing market.

FMR's share price underperformed dramatically during the late 1990's as the print sector entered a cyclical trough. From the highs in 1996 FMR fell almost 80 percent to an all time low of 46.5p in 2001. However the chart structure has improved somewhat over the last few years, with FMR trading in a large range between 92p and 46.5p.

We believe that the worst is now behind Fulmar, and we are encouraged by the outlook for earnings growth. We have been particularly impressed that Fulmar has been able to mitigate a downturn in commercial and financial printing through diversification into the burgeoning book industry.

FMR's interim results to 30 June 2004 were solid, with turnover increasing 4.2 percent to £21.63 million. Operating profit rose 18.2 percent to £2.25 million, primarily as a result of cost containment initiatives.

Turnover in commercial printing was steady, increasing 1.9 percent to £15.09 million despite continuing pressure on prices. We are heartened by management comments that demand has remained strong since the half year end.

We applaud the initiatives undertaken by management to address margin pressures. In May the operations of W E Baxter were reorganised and relocated to the nearby premises of Pegasus Colourprint. Both businesses are broadly-based commercial printers, already sharing pre-press facilities, and FMR should gain significant cost efficiencies following this move.

We have full confidence in Fulmar's ability to secure further market share gains. FMR's stable of commercial printing businesses is highly respected within the industry. Annual reports producer, Royle Corporate Print, was recently commended at the Printing World Magazine annual awards and Fulmar Colour, the Group's largest commercial printer, has achieved similar recognition in the past.

The Group's book printing operations have continued to perform solidly, with turnover increasing 10.1 percent to £6.54 million. FMR's jacket and cover printing operation, White Quill Press, increased turnover by 11 percent. Robust demand has driven an increase in capacity, with the addition of a new printing press transferred from W E Baxter. FMR's mass-market paperback book printing operation, Bookmarque, has witnessed robust growth since being formed in 2000, with sales increasing a further 8.5 percent this half. Strong demand has also enabled Bookmarque to increase capacity. The business recently purchased a new £1.5 million web printing machine.

We are highly impressed that FMR has been able grow the book printing business and respond effectively to difficult conditions in commercial printing whilst increasing balance sheet strength. Net debt at 30 June stood at £9.62 million with gearing falling to 38 percent from 52 percent at year end. Liquidity was boosted by the sale of Baxter's freehold premises and a reduced level of capital expenditure following heavy investment in prior years. Interest cover is now particularly solid at 7.6 times operating profit before exceptionals. We expect balance sheet strength to improve further over the coming year as restructuring benefits begin to flow through to the bottom line and cash flow performance.

Fulmar's commitment to a high level of investment in innovation will deliver significant earnings gains over time in our opinion. We expect FMR's technological edge to underpin efforts to claim market share, and allow significant exposure to the eventual upside in commercial and financial print trading conditions.

We believe Fulmar is well positioned to withstand any further pricing pressure in commercial printing given cost reduction initiatives to date and the encouraging outlook for the book operations. We regard FMR's current valuation fundamentals as compelling. The shares trade on a forward price earnings multiple of around 11 times, and offer a chunky yield of almost 7 percent. In addition Fulmar has strong asset backing with net tangible assets per share of 92p at June 30.

Chief executive Mike Taylor has a 55 percent stake in Fulmar which we view positively as it ensures his interests are closely aligned with other shareholders. While this means that the stock is relatively illiquid, it does bode well for Fulmar's highly attractive dividend policy.

From a technical perspective, recent price action has also been cause for optimism with the shares breaking out from a bullish wedge formation. The wedge originated last December and is clearly visible on the charts. A bullish wedge indicates that selling pressure is dissipating and that a stock is potentially on the verge of an important turning point. In the case of FMR, the recent breakout suggests to us that a lasting recovery is beginning to take hold.

With prices currently trading at historically low levels, we believe that FMR provides an attractive opportunity. Ultimately we anticipate prices breaking to the topside of the range, and believe that targets towards 140p are achievable in time. Fat Prophets recommends that Members buy FMR up to 75p.