PGH - Pact Group Holdings

@Miner Its one I have looked at a couple of times, on most metrics I look at it certainly looks cheap, but the big problem for me is the debt is more than the equity, thats a big red flag for me. It is a business @ROE always liked and held, which was one of the reasons I looked at it pretty hard.

Edit - just looked back through my posts on PGH. Should have just posted "ditto" again!!

galumay said:

@Miner Its one I have looked at a couple of times, on most metrics I look at it certainly looks cheap, but the big problem for me is the debt is more than the equity, thats a big red flag for me. It is a business @ROE always liked and held, which was one of the reasons I looked at it pretty hard.

Edit - just looked back through my posts on PGH. Should have just posted "ditto" again!!

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Dear @galumay
Merry Christmas.
Yes I noticed the big debt and agreed to have the same concern like yours.
However looking into Zeminder and Kin investment, get puzzled why they kept on putting their wealth instead of repaying the debt.
Either they are ignorant or know something which I don't read with the published numbers.
do not hold just part off my exploration.

Hey @Miner, same to you & yours. I guess with the cost of debt at the moment a lot of businesses figure its a magic pudding.

A lot of investors a lot smarter than me reckon I am mad to worry about debt/equity and say that as long as the interest cover is reasonable then not to worry. Thing is I am not very smart, I have to keep my rules really simple and with a large margin of safety.

galumay said:

Hey @Miner, same to you & yours. I guess with the cost of debt at the moment a lot of businesses figure its a magic pudding.

A lot of investors a lot smarter than me reckon I am mad to worry about debt/equity and say that as long as the interest cover is reasonable then not to worry. Thing is I am not very smart, I have to keep my rules really simple and with a large margin of safety.

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well i wonder about debt when i ponder a stock purchase , HOWEVER one tweak i have , is to consider if that debt has been securitized ( used assets like property as collateral for that loan ) lenders get nervous slower if they see some industrial property as the consolation prize of a bad loan )

being older than some members here , i remember times when interest rates rose quickly , so i would consider you cautious rather than 'mad' ...

now the balance of acceptable caution vs. the pursuit of profit/growth is a very personal thing ( imo )

galumay said:

@Miner Its one I have looked at a couple of times, on most metrics I look at it certainly looks cheap, but the big problem for me is the debt is more than the equity, thats a big red flag for me. It is a business @ROE always liked and held, which was one of the reasons I looked at it pretty hard.

Edit - just looked back through my posts on PGH. Should have just posted "ditto" again!!

Click to expand...

Ditto? Looks like PGH is now sitting on all-time lows. At a share price of ~ $1

• Market cap is about $350 million,
• $660 million in long-term debt (And about $500 million in lease liabilities)
• Net tangible assets are negative,
• Forecasting: EBIT in the range of $68 million to $73 million and Underlying NPAT in the range of $20 million to $25 million for the first half of FY23. - Note they've probably had 5 straight years of underlying NPAT of greater than $70 million.
• ~$450 million in impairments since 2019
• Major shareholder is also chairman controls ~ 50% of the company (having bought $8m more shares in September)
• The noted target dividend is 40% of underlying NPAT, however that % is currently lower than that and they have said it will return to 40% when international markets return to normal.

There's usually a point at which these smaller caps are worth the risk, but not sure PGH is low enough yet for my liking. They are looking at a substantial fall in forecast NPAT relative to the last 5 years and I am looking forward to the HY results to see exactly which costs have gone up or revenues down. I thought most cost increases would have already been absorbed in FY22. No doubt the interest expense on the debt would be hurting the profits.

"ditto", because I have been saying the same things about PGH for years! Still doesn't look anywhere near cheap enough to interest me. I agree with your summary.

13 September 2023
Kin Group to make unconditional off-market takeover offer for Pact
 Unconditional off-market takeover offer to acquire all the Pact Shares that it does not own at A$0.68 cash per Pact Share.
 Pact is now a smaller business with a reduced earnings base and faces a challenging environment, with supply chain disruptions, inflationary pressures, fluctuating resin prices, labour constraints and macroeconomic uncertainty.
 The Offer is unconditional and not subject to any defeating conditions.
 Kin Group has a controlling interest of over 50% in Pact.  Offer price provides certain value and liquidity for shareholders. Kin Group Pty Ltd (“Kin Group”) today announces its intention to make an unconditional A$0.68 cash per share off-market takeover offer (“the Offer”) for all of the ordinary shares in Pact Group Holdings Limited (“Pact”) (“Pact Shares”).
The Offer will be made by Bennamon Industries Pty Ltd (“Bennamon Industries”), a wholly owned subsidiary of Kin Group.
The consideration under the Offer is A$0.68 cash per Pact Share (“Offer Price”).
The Offer provides shareholders with liquidity and certainty of an unconditional, all-cash offer at a price above Pact’s share price of A$0.675 per share at the close of trading on 12 September 2023, and allows shareholders to avoid any further risk associated with their Pact investment.
As at the date of this letter, Kin Group has a controlling interest of over 50% in Pact.
Given Kin Group’s current ownership, the prospect of a competing offer eventuating is highly unlikely. In the absence of Kin Group’s Offer, the future value of Pact Shares is uncertain. Kin Group has every confidence in Pact and its employees. However, Kin Group considers that success for Pact is best achieved under private ownership without the additional costs, market volatility and complexities of being an ASX listed company.
Kin Group intends to delist Pact from the ASX as soon as it is able to do so (subject to the ASX Listing Rules, legal, tax and other considerations, and the level of acceptances).
Key reasons to accept the Offer
1. Pact faces a challenging environment, with supply chain disruptions, inflationary pressures, fluctuating resin prices, labour constraints and macroeconomic uncertainty
2. Pact is now a smaller business with a reduced earnings base. Notwithstanding the sale of 50% of Pact’s Crate Pooling Business, Pact will likely continue to have high debt in light of its ongoing capital expenditure plan. Accordingly, there is uncertainty about the prospect of future dividends in the short to medium term
3. Kin Group controls Pact and the prospect of a competing offer eventuating is highly unlikely.
Kin Group intends to delist the business as soon as it is able to do so 4. Pact is no longer in the S&P / ASX 300 index and has low institutional investor support. Compared to recent trading prices, the share price has declined and may fall further after the Offer closes 5. Unconditional cash offer provides certainty at a price above last close (12 September 2023) and an opportunity for minority shareholders to receive liquidity Unconditional Offer The Offer is unconditional, which means it is not subject to any defeating conditions.
Conflict Management Kin Group’s Chairman, Raphael Geminder, who is the Chairman of Pact, has advised the Pact Board of his conflict of interest in respect of the Offer and has recused himself from the Pact Board and Committee consideration of the Offer for the duration of the Offer Period. Competing Proposal Given Kin Group and its associates have a controlling interest of over 50% in Pact and have no intention of selling its existing interest, Kin Group can, on its own, prevent any other potential bidder from acquiring control of Pact.
makes any competing bid for Pact highly unlikely. Bidder's Statement Kin Group will lodge a copy of its Bidder's Statement with ASIC, and send a copy to Pact and the ASX, today. The Bidder's Statement contains detailed information about the Offer including how to accept.
The Bidder's Statement is expected to be sent to Pact's shareholders on or about 27 September 2023 (although this is subject to change). On Market Purchases Bennamon Industries reserves, and may at any time exercise, the right to purchase Pact Shares on market during the bid period in respect of the Offer, for prices at or below $0.68 per Pact Share.
Bennamon Industries has appointed Macquarie Securities (Australia) Limited to make any such purchases on Bennamon Industries’ behalf. Advisers Macquarie Capital is acting as financial adviser and Ashurst is acting as legal adviser to Kin Group in relation to the Offer.
- ENDS -

i do not hold this share

now here are some entries for my little black book

Kin Group has increased its buyout bid for Pact Group to 84¢ a share, from a previous 68¢ offer. The shares jumped 23 per cent to trade at the new bid price.

It is looking highly unlikely that Bennamon / Kin Group / Raphael Geminder will be successful with compulsory acquisition at the current price. They hold roughly 87% but acceptances have practically stalled and the offer is now almost six months old. I’m surprised they even bothered with another three-week extension but they appear to be desperate at this stage.

There is a major shareholder that has been continuing to accumulate and now holds over 6%, and one or more larger holders who own 1-2%. Recent reports also indicate that there are still over 1,800 registered holders with marketable parcels therefore preventing ASX delisting despite the Bidder’s Statements.

From a valuation perspective, it is a very compelling investment. Based on H1 FY24 results there was a $204.8m decrease in net debt (there was an asset sale) compared to the PCP and full year revenue is at a ~$1,900m run rate. H1 FY24 Underlying EBITDA was $137m. There has been significant investment in new and existing manufacturing facilities so cash flows are likely to improve considerably in the medium term.

It wasn’t all that long ago that the company was able to consistently pay dividends in excess of $0.20 (on considerably lower revenue), which translates to a roughly 24% yield based on the current offer. Positively, shares outstanding have not increased considerably since that period but dividends have been put on hold to cover the cost of the new investments.

The offer from Bennamon / Kin Group only values the business at a ~$290m market cap. Raphael Geminder also previously acquired very large parcels of shares in the ~$2 to $6+ range. The offer seems nothing more than opportunistic before Pact’s recent investments start to see significant returns.

I can see why they’re so desperate to complete the acquisition but I suspect they’re going to have to let the offer expire and provide a significantly higher offer at a later date if they still intend to achieve compulsory acquisition.

Over recent days there has been media coverage of the ongoing takeover.

An application was made to the Takeovers Panel implying that one or more emails and Supplementary Bidder’s Statement’s contained a number of misleading statements (by way of both commission and omission) and/or were confusing. The misleading and/or confusing nature of the email(s) / statements has coerced and may coerce shareholders who would not have otherwise accepted the bid to accept.

The Takeovers Panel has made interim orders restraining Bennamon Industries Pty Ltd from processing any acceptances received from Pact Group shareholders under Bennamon’s current takeover bid for Pact Group.

Having reviewed the emails in question and Supplementary Bidder’s Statement I am in agreement with the application to the Takeovers Panel. I have seen public comments from various shareholders that sold (or were close to selling) due to the statements implying that Pact would be delisted.

Clearly others are now starting to see how undervalued Pact Group (PGH) is. FY24 revenue was over $1,850m and the business has generated significant cash flow over the years but it is still trading at a market cap of only $330m.

The recent investment in new facilities should start to generate increased profits. It certainly has significant upside.

It looks optically cheap on misleading metrics like P/E, but when you dig into the financials, its the same old problem with PGH. Debt.
Debt is now greater than equity, that really tells you all you need to know. Also no FCF, nearly all the earnings last year were non-operational (from discontinued businesses) which is why the P/E is low, but its not a reflection of the business value.