Description

Executive Summary

Multi Packaging Solutions International Limited (“MPSX” or the “Company”) is a global provider of value-added specialty packaging solutions for the consumer, healthcare and multi-media markets.  The Company went public very recently (shares priced at $13.00 on 10/21/15 and started trading on 10/22/15).  Given the shakiness of the IPO market, the deal was priced at a pretty big discount to its original range of $15-17.  With the volatility dynamics of the IPO pricing / initial trading now subsiding, the stock should begin trading on its fundamentals, hence the investment opportunity.

Not only is the FCF yield of the stock at current levels very high at 13.4% but also the “path to getting paid” on the stock relatively straightforward through numerous drivers.  These include (i) marginal buyers now entering the stock which either didn’t participate in the IPO or received smaller-than-desired allocations, (ii) steady deleveraging of the balance sheet which accretes value to the equity, (iii) initiation of research coverage by sell-side firms, (iv) index inclusion and associated buying by mutual funds and ETFs, (v) announcement of accretive acquisitions which management has stated they are actively pursuing and (vi) potential initiating of capital returns to shareholders through dividends and repurchases once the balance sheet is sufficiently deleveraged.

My price target for the stock over the next twelve months is $21, equating to >30% upside from current levels.

Company Description

MPSX is a global provider of value-added specialty packaging solutions for the consumer, healthcare and multi-media markets.  The Company provides its customers with an extensive array of print-based specialty packaging solutions, including premium folding cartons, inserts, labels and rigid packaging.  The Company’s acquisition adjusted pro forma net sales for fiscal year ended June 30, 2015 by geography, end market and product offering are the following:

·         By Geography:                 North America – 47%, Europe – 47%, Asia – 6%

·         By End Market:                Consumer – 50%, Healthcare – 37%, Multi-Media – 13%

·         By Product Offering:       Premium Folding Cartons – 62%, Inserts – 42%, Labels – 7%, Rigid Packaging – 5%, Other – 12%

Additional detail about the Company’s product offering is below:

·         Premium Folding Cartons:  Premium folding cartons are forms of secondary packaging which play an important role in customer’s branding and marketing strategy by influencing purchase decisions at the point-of-sale by conveying appearance.  Examples include the glossy packaging outside of liquor bottles, perfume bottles, tobacco products, high-end chocolates, etc.

·         Inserts:  For MPSX, the primary end market for its inserts is healthcare.  Specifically, MPSX supplies the informational inserts typically found with healthcare products such as inhalers, pharmaceutical products, nutritional supplements, dental hygiene products, hair care products, etc.  Inserts are of particular importance in the healthcare end market given stringent regulations to ensure the accuracy of product information.  Numerous regulatory bodies require an increasing level of product information to be made available to the consumer.  Providing this increasing amount of information requires larger, and in many instances, more complex inserts.

·         Labels:  The majority of MPSX’s label offering are pressure sensitive labels sold primarily into the healthcare market.  The labels serve both to identify the product to consumers as well as to function as a conduit for fulfilling regulatory requirements, communicating product-related information to consumers and contributing to product integrity and security.

·         Rigid Packaging:  MPSX’s rigid packaging product offering is composed of rigid boxes which are commonly used to present ultra-premium products for the high-end spirits, perfume and other luxury product markets.

·         Other:  MPSX also provides additional print-based specialty packaging products, including transaction cards, point-of-purchase displays, brochures, product literature, marketing materials and tags.

Key Attributes to MPSX’ Business

There are multiple aspects of MPSX’ business which make it highly favorable from an investment perspective:

·         Market Leader Focused on Attractive End Markets:  MPSX is a leading packaging supplier to the consumer and healthcare end markets where it generates 87% of its revenues.  These end markets are highly attractive because they have generally proven to be recession resistant over time and tend to experience steady growth in excess of GDP.

·         Competitively Advantaged through its Global Footprint and Scale:  MPSX is one of the few companies in its addressable markets which offers a full range of products across multiple geographies.  This capability presents a compelling value proposition to customers as they continue to rationalize their supply chain and seek to partner with global suppliers.  MPSX’ ability to be a “one-stop shop” on a global basis for its customers simplifies and optimizes their supply chains and represents a significant opportunity for the Company to take market share from smaller, local and regionally focused specialty packaging providers.  Further, as one of the leading global providers of value-added specialty packaging solutions in a fragmented industry, MPSX’ scale provides it with competitive advantages including: innovative design and new product development, purchasing leverage, value-added supply chain solutions and redundant manufacturing capacity from a global footprint.

·         Diversification:  MPSX’ business is diversified by geography, product offering and end markets (percentages for each presented above).  This degree of diversification adds stability to the Company’s business as its not reliant upon any specific geography, end market or customer.

·         Favorable Growth Prospects:  Based on management estimates, the market opportunity across the Company’s primary addressable markets is currently in excess of $17 billion in annual sales.  Accordingly, the Company has substantial opportunity for growth going forward given its current $1.8 billion in annual sales.

·         Established Acquisition Track Record:  MPSX has an established track record for completing successful acquisitions.  In particular, the Company’s management is extremely familiar with the competitive landscape and has demonstrated its discipline in only acquiring businesses which suit its strategic needs as opposed to acquiring businesses for the sake of augmenting growth.  Continuing to pursue and complete strategic bolt-on acquisitions ($50-100mm in target size, per management’s guidance) is another area of growth for the Company.

·         Margin Expansion Potential:  Management is targeting an expansion of its adjusted EBITDA margin from 13.5% to 17.0% (on a run-rate basis) over the next 15 months.  Part of this margin expansion will come through continued synergy capture from recent acquisitions.  Specifically, management is targeting the capture of $40 million in total synergies (up from $28 million current run rate) from its relatively recent Chesapeake and ASG acquisitions (significant detail on these acquisitions can be found in the IPO prospectus).  These savings are expected to come from procurement, leveraging existing selling, general and administrative functions, optimizing workflow within and across sites and driving operational performance through close monitoring and management.  The balance of the margin expansion will come from management initiatives.  Over the last five years MPSX management has invested over $330 million in its manufacturing network to provide and improve scale and geographic coverage, operational flexibility, security of redundant capacity and ensure site accreditation.  Management is continuing to improve the Company’s productivity and asset utilization by optimizing its industrial footprint, rationalizing its facilities, and remediating underperforming sites.

·         Low Capital Intensity:  MPSX’ business is very low in capital intensity.  Management is guiding that capex for the business will continue to be only 3.5% of annual revenues, equating to ~ $63mm/year vs. ~$260mm/year in EBITDA for FY 2016.

·         Near-Term Focus on Deleveraging:  MPSX’ near-term focus is on deleveraging its balance sheet.  Pro forma for the IPO, the Company has a Net Debt / EBITDA ratio of ~4.0x.  Management intends to direct its FCF toward debt reduction which will steadily accrete value to the equity.  Of note, the high degree of leverage will also hinder management’s ability to pursue any type of large acquisition which equity holders may not favor, mitigating this risk.

Financial Analysis and Valuation

Presented below is a summary of both historical and projected financials for MPSX as well as a valuation analysis for the stock.  All of the historical and pro forma figures come from the IPO prospectus.  Unfortunately, the financial information about MPSX is relatively limited (for instance, there are no quarterly financials presented in the IPO prospectus and pro forma information by segment or geography is also not presented).  However, reasonable financial projections can still be made from the limited information available.  Of note, none of the projections presented below are aggressive and appear very achievable.

Several things to note:

·         Revenues – To be conservative, I’m projecting 0% revenue growth in 2016 (June FY end) and only 1% annually thereafter.  On an organic basis, MPSX’s has typically grown its business in excess of GDP.  Should we enter into a recession next year where growth could be negative, for MPSX’ business to remain flat in this environment seems reasonable.

·         EBITDA Margins – Management believes they can expand the Company’s EBITDA margins to 17.0% on a run-rate basis by the end of calendar 2016 (~15 months).  I am projecting MPSX will achieve this margin goal for the full year fiscal 2018, roughly in-line with management’s guidance, but again, arguably conservative as margins could continue to expand past 17.0% which I am giving no credit for in fiscal 2018.

·         Taxes:  Management has guided to a book tax rate of 28% going forward and a cash tax rate of 20% until 2018, after which the Company’s NOL’s will be exhausted and it will shift to a 28% overall cash tax rate.

·         Capital Expenditures:  I am projecting capital expenditures equating to 3.5% of sales, in-line with management’s guidance.

Target Price

Based on the projections and as shown in the valuation analysis, the stock is currently trading at a 13.4% FCF yield which is highly attractive.  Assuming that the stock should trade up to a still very attractive 10% FCF yield on FY 2017 FCF of $164mm, the market capitalization of the Company would be $1.64 billion or ~$21/share on 77.4mm shares outstanding.

Key Risk

The biggest near-term risk to MPSX is the expiration of the lock-up period for the sale of secondary shares.  Post the 180-day lock-up expiration, 60.9mm shares or 78.7% of the total outstanding, will come off restriction.  The inevitable selling by MPSX’ private equity owners through secondary offerings could place downward pressure on MPSX’s share price.  The mitigant to this risk, however, is that trading liquidity should improve through the expansion of the float and enable a larger universe of buyers to enter the stock.

Catalyst

There are multiple catalysts for the stock:

(i) marginal buyers now entering the stock which either didn’t participate in the IPO or received smaller-than-desired allocations

(ii) steady deleveraging of the balance sheet which accretes value to the equity

(iii) initiation of research coverage by sell-side firms

(iv) index inclusion and associated buying by mutual funds and ETFs

(v) announcement of accretive acquisitions which management has stated they are actively pursuing and

(vi) potential initiating of capital returns to shareholders through dividends and repurchases once the balance sheet is sufficiently deleveraged.