Description

Polyair Inter Pack Inc (PPK)
Intro
Polyair is a packaging and pool products on pace to put up an all time record year in EPS and revenues trading @ 3.7x EV/EBITDA (this yrs), trailing 5.11x EV/EBITDA, and approximately 6.4x EV/FCF. PPK has a lot to like: Strong proven management/CEO (heads of two divisions 33 yrs @ ppk+ CEO 10yrs on the job), strong growth prospects (e-ecommerce: AMZN, BKS, Target, TOY), high margin oligopoly (PPK, SEE, PTV) market structure (OM 11.7% industry avg, PPK’s ROE is 17% on depressed #’s should get to 21% this yr, EV/sales .50x). PPK has several compelling opportunities to significantly grow the company through e-commerce. The company provides packaging/fulfillment services for Internet operations of Amazon, Barnes and Noble, Target, and Toy’r’us. The company has several competitive advantages: distribution, Razor/razor blade business model in e-commerce operations, and strong loyalty from distributors. In addition, the company is well diversified across product lines, which allows stable revenues and EPS (the only cyclical part of their business during the year is the summer due to pool covers). I believe this is an outstanding small company ($113mm in revs), with high ROE 17%(LTM), and very low EV/FCF 6.7x that is worth $10.58-$11.25 per share (based on DCF or 6x EV/EBITDA, upside 125-140%).
I believe over time they will become a #2 player to Sealed Air (SEE).
Business
Packaging/Insulation (70% of revenues)
PPK has 5 product lines on packaging side used in mainly automotive, furniture, electronics, retail (e-commerce), and mail order companies.
1) Durabubble: bubble wrap (strongest in industry), 100% recyclable, CFC Free,
2) Mailers: fulfillment products are: ecolite, Decolite, Ecolite White, E-com(designed for DVD’s, CD’s, VHS, Mini disks) , FastPak
3) Starfoam: surface protection and cushioning: Products: Starbond, Starmask, Lamibag, Starmover, Starkraft, Starnet, and Lamifoam. Starfoam is resistant to punctures or tears.
4) Insulation: Radiant technology for residential and commercial construction industry, aluminum surface that reflects heat back to it source.
5) Systems: AirSpace and TotalFoam Solutions air pillows to fill void in packaging (razor/razor blade business sell machines on line then re-purchase air pillows for packaging).
PPK produces allegedly the thinnest foam packaging on the market, which creates a smooth surface to cover the product, and pack large number of items into small spaces lowers shipping costs.
Cantar: Pool Products (30% of revenues)
A typical pool cover has product obsolescence in 2-5 years, which provides good recurring revenue stream.
Aqua Cover brand: solar blankets, reel systems, winter covers,
Molly Brown Floatation Cushions
Construction tarps
Camping pads
Protect a pool Fencing
The pool business in terms of a 1 stop shop for pool supplies is #1 in the US.

Polyair distributes through 2500 North American distributors and 5000 shipping destinations.
Approximately 85% of Polyair sales are from US. PPK can add up to 40% in additional revenues without adding capacity. Polyair has been in business since 1968 and public since 1996.
Company is in process of re-negotiating short term debt to long term debt, this will allow for dramatically improved working capital. Consolidated Mercantile (CSLMF) owns 39% of PPK
“Your directors are extremely pleased with the results achieved at both operating units (one being PPK) and our ability to sustain profits during a difficult economic period.” (Annual report 2001, CSLMF)


On the e-commerce side the product the company sells is called AirSpan. It is a strong model in that they get their machines designed into the fulfillment centers and then sell their packaging products like a razor/razorblade model.
The company strategic advantage is they build very strong relationships over time with their distributors who are very loyal (not much switching in the industry). PPK is holding their market share and successfully introducing new products (like AirSpan). The other strategy is that the company “stays in the face of their end user.”


Financials Last 10 qtrs
Revs Net Per Share
Jan ’00 $19.12 ($.29) (.04)
Apr ’00 $25.68 $1.028 .15
July ’00 $28.70 $1.043 .16
Oct ’00 $31.45 $1.351 .21
2000 EBITDA $11.3mm

Jan ’01 $23.74 ($.479) .07)
Apr ’01 $26.95 $.120 .00
July ’01 $29.92 $.491 .07
Oct ’01 $31.02 $1.641 .27
2001 EBITDA $11.2mm

Jan ’02 $23.75 $.062 .01
Apr ’02 $29.64 $1.120 .18
July ’02E $31.5 $1.300 .23
Oct ’02E $35 $1.855 .32
2002 EBITDA $15.7mm


Valuation
The pool business is worth .7x sales or $20mm and the packaging business is worth 1.45x sales $100mm less $30mm in debt or $15 per share NAV. The real value to PPK is in the packaging side of their business which is in many cases a solid #2 competitor to Sealed Air (a tremendously well run company). I believe that over time PPK will make quality acquisitions and grow core packaging business into a solid competitor to SEE. PPK has attractive opportunities to continue to penetrate the US market and possibly move into Europe over time.
Henry Schnurbach, CEO, has an outstanding reputation in the industry and long track record of success running PPK. In speaking to other investors who I respect, they have nothing but the highest praise for Henry. I seem to agree. He called right back and answered every question candidly. Most important, Henry has the passion and drive to win in his business.

6.22mm * 4.70= 29.23mm +9.7mm+11.589mm+9.361mm= $59.73mm- $900K= $58.83 EV
EBITDA $11.5 = EV/EBITDA 5.11x
EBITDA $16mm= EV/EBITDA 3.62x
I estimate D&A = Maintenance Capex so net is FCF, which should be about .70 per share, or about 6.7x FCF.

2002 EBITDA
$118mm in revs
Est. Operating Inc: $9.2mm
Est: D&A $6.5mm

Using a NOPAT DCF I get a value of $11.25 using conservative assumptions:
5% top line growth (6.7% last yr on depressed #’s)
9% EBITDA margin (11.5% LTM)
41% TR
WACC 7.46%
NAV =$105mm-$30.65mm= Value of $76.1mm/6.2mm = $12.27 per share

COMPS TO PEER GROUP


P/e 5 yr growth rate ROE OM EV/Sales
Sealed Air (SEE)17.1x 12% 16% 13.5% 1.5x
Pactiv (PTV) 18.2x 7% 11% 14.5% 1.8x
Polyair (PPK) 6.7x 18% 17% 7.1% .50x

Group avg. 14x 12% 14% 11.6% 1.26x

(NOTE that PTV is more consumer packaging hefty garbage bags vs. SEE/PPK Commercial side)
Comp values
P/E- $10.08
EV/Sales- $12.09
PPK trades @ 47% of peer group p/e multiple, with a 5 yr growth rate 50% above peers, 21% better ROE, 61% of peer group OM, and only 40% of ev/sales.

Catalyst

Catalysts
Management is outstanding
Record EPS by huge margin .71 per share vs. previous best .48 per share in 2000, record revenues
Margins should start to expand as capacity is utilized: Revenues can go up 40% without additional capacity
, attractive growth prospects through e-commerce,
normalized OM 11%, Projected ROE this yr. 21% +
Equity trading @ 6.4x EPS, 6.4x FCF and EV/EBITDA of 3.7x.
Reasonable growth coming.
Under-followed, under-loved, under-owned.
Quality management CEO honest and straight shooter.
Possible buyout from PTV or SEE
Management is going to go on the road to meet with investors in early Sept 02.
Company has bought back 500K shares last 3 years about 8% of shares outstanding.
Classic Gramham & Dodd value