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Global printing technologies group Domino Printing Sciences (DNO) is a FTSE 250 share which has substantially de-rated in the second half of 2011 – from over 700p to about 480p, where it trades on a forward price-earnings multiple of about 12 times and yields 4%. The chart looks at odds with a highly respectable, long-term record of revenue and dividend growth, also recent years’ investment that should bear fruit.
The difficulty is all the European problems impacting not just on equipment sales in France and Spain but business confidence generally, management says. Yet this is a quality business, a share to be following in the downturn: there is a buying opportunity emerging here, just a matter of timing.
Domino’s printing equipment technologies meet coding and labelling needs for products and packaging: an essential service in many respects, albeit one that still has a cyclical element. The equipment side of the group is geared to companies’ decisions on capital spending. About 35% of revenue is derived from sales of new equipment, the main element being after-sales’ consumables and services, which ought to help mitigate downturn. Indeed, normalised pre-tax profit held steady over 2008-09, so Domino has shown its resilience in recent times.
The key issue is Europe, where Domino made 74% of its £72.8 million operating profit in its last financial year to end-October. Achieving 11.0% growth, Europe (including UK, not just the Continent) rose from 71.5% to 74.0% of total operating profit. The Americas slipped nearly 9% although prospects are becoming brighter. Asia is doing well, with some territories in double-digit growth.
The current challenge for weighing up the shares is whether customers are just being cautious like so many of us, amid the news headlines, or if this is the early stage of a more serious European downturn.
What perturbed investors was the change in tone after summertime. While the 21 June interims cited 8% revenue growth against a strong comparative, by mid-September a trading update said that like-for-like sales in the four months from end-April had slipped 1% – some downturn, relatively. Most of the shares’ de-rating had happened by this point though, with the summer stockmarket jitters.
Management said in the 13 December prelims, uncertainty over Europe was impacting confidence “around the world and we saw a slowdown in the rate of order conversion on capital equipment projects”. This is interesting in the wider context of how euro-woes are starting to affect global business, even before any real crisis has erupted.
In terms of Domino’s actual trading, France and Spain are the difficult spots, whereas the UK and German businesses reported strong growth. The underlying return on sales has increased to 18.9%.
Relative to the 2008 downturn, after-sales products/services have been more resilient and this should help limit downside risk; however companies’ capital spending decisions remain a key factor.
At least Domino has positioned itself well. Research and development investment was £15.3 million in the last financial year, and strongly rising RD in recent years has enabled product launches with “good progress towards our goal of introducing a whole new family of printers based on common electronics architecture”. New products now represent 20% of total equipment sales.
Obviously this comes at a cost and you need to consider what extent might be essential for a technology business like Domino to sustain its competitive position; however recent performance suggests this investment has been overall value-enhancing.
Prelims affirmed an unbroken 33-year record of sales growth to £314.1 million, with pre-tax profit up 10% to £57.4 million and underlying earnings per share up 7% to 38.7p. With strong cash flow and net cash of £22.8 million at the year end, however, the total dividend rose 20% to 18.75p. This has been the 26th year of continual dividend growth since the company was floated in 1985, after founding in 1978.
The end-October balance sheet was sound, with £16.3 million borrowings well offset by £39.1 million cash. The net interest charge was therefore negligible. Of 193.2 million net assets, goodwill and intangibles represented £81.8 million, fair enough for a technology business. An overall net asset value of 174p a share, relative to about 500p market price, does however put the valuation emphasis on earnings.
The dividend is covered twice by earnings, which pretty much sustains Domino’s historic payout ratio, and is projected to maintain, although the European situation makes it hard to be sure about dividend growth when there is not a lot of cover room. This puts the prospective yield close to 4%, still useful and which should help limit downside.
With regard to natural disasters, risks such as the Thai floods, which affected Pace (PIC) severely, Domino says it has increased its strategic stocks of components and chemicals where sole suppliers are necessarily involved, to help ensure continuity of customer service.
Citigroup has upgraded to ‘buy’ following the results, and together with the 20% dividend hike this may explain the price rise near 510p at the start of this week. It is probably going to take until the mid-March 2012 nterim management statement, however, to determine what is the effect of all the eurozone strains on the business.
It would be more encouraging currently if the directors were adding to their quite modest shareholdings – but their only purchases since the de-rating have been token, as part of a share incentive plan. While the non-executive chairman owns 314,000 shares, the group managing director, commercial director and finance director own 328,200 across the three of them – so no great equity exposure.
Overall this is still a good-quality share to bear in mind during the inevitable times when the market falls during 2012.