Standard & Poor’s last week revised the outlook on its ’BB+’ long-term rating on Australia and New Zealand’s largest commercial printer, PMP Ltd., to positive from stable. The outlook revision reflects the potential for PMP’s long-term rating to be raised to ’BBB-’ in the next two years as the group continues to improve the efficiency and flexibility of its cost base, strengthen is market leadership position, and improve its financial profile. These factors will be key to enhancing PMP’s capacity to sustain satisfactory earnings, margins, and cash flow protection through the economic and advertising cycles. A key driver of PMP’s improving operating efficiency will be the company’s A$124 million investment in new heat-set web printing equipment. Installed over the next 12 months, this equipment is expected to enhance the efficiency and flexibility of the group’s core print capability significantly. "The successful implementation and operation of this equipment, and PMP’s capacity to sustain adequate returns through a down cycle, will be key to any upside potential for the rating," said credit analyst Paul Draffin, associate director, Corporate & Infrastructure Ratings.
At the same time, PMP is expected to maintain its conservative approach to dividends and capital management initiatives as it applies its improving cash flows to funding the new printing capacity and small bolt-on acquisitions. Free cash flow generation also will be assisted by a significantly lower interest expense on the group’s refinanced debt facilities, significant available tax losses, and the group’s ongoing performance improvement program, which should allow funds from operations to debt to strengthen to more than 35% in the next two years. Nevertheless, PMP’s revenues will remain heavily exposed to cyclical demand and periods of excess industry capacity, which underlines the need to enhance the variability of its cost base, and to focus on value-added print and related services that improve the group’s pricing power through market cycles.
