True, it was a bad day for markets generally, but news that the company's results for 2015 would still reflect double-digit growth in adjusted operating profit, improved free cash flow and increased adjusted earnings per share when compared with 2014, were completely overlooked. Analyst Guy Hewitt at brokerage finnCap now expects 2015 full-year EPS to rise by around 15 per cent to 5.3p, which means that the shares are now priced on 8.5 times likely earnings. The historic dividend yield is 4.5 per cent and analysts still expect the payout to be hiked by 10 per cent to 2.2p, so the prospective dividend yield is almost 5 per cent.
The profit shortfall reflects a lower than expected contribution from the company's shopper marketing agency, acquired in January this year, due to some reduction or deferral in spending by existing clients and to the phasing of certain new business opportunities. When the business was acquired for an initial consideration of £14m, forward guidance pointed to it delivering cash profit of £1.4m this year, up from £1m in 2014. Communisis issued the vendors with a two-year, bank guaranteed promissory note of £9.3m, £700,000 in cash and almost 8m new ordinary shares.
There is an earn-out agreement, too, with additional consideration of up to £9.3m payable on the basis of the acquired businesses' future performance including its average adjusted cash profit for the two financial years ending 31 December 2015 and 2016, and the contribution from defined savings realised over the three financial years ending December 2017. The additional consideration will be satisfied in cash of up to £7.3m and by the issue of new ordinary shares up to a value of £2m. Clearly, if the business has not delivered as expected, the earn-out will be reduced, too. Moreover, there is an incentive for the incumbent management team to get the business back on track to maximise the deferred consideration.
I would also point out that Communisis' other divisions are all trading in line with expectations, and chief executive Andy Blundell points to a number of important contract wins and renewals in the latest three-month period which "together with the health of our pipeline, provide positive indicators of the company's prospects for 2016".
Admittedly, this is not the first time the company has disappointed. Indeed, when I appraised the half-year results in the summer and concluded the shares rated a hold at 50p ('Value judgements', 3 Aug 2015), I pointed out that "the low rating attributed to the shares is down to investors' perception of the company. This is only likely to change when the company starts reducing borrowings, its cash conversion ratio improves, and one-offs no longer weigh so heavily on the income statement. If the management team at Communisis can deliver...then perhaps the long awaited re-rating will finally start."
Clearly, an earnings miss is not what I had in mind, but this needs to be put into context as the company has still delivered double-digit earnings growth and the forward pipeline supports what should be another double-digit rise in earnings in 2016. In the circumstances, I think investors have overreacted. Trading on a bid-offer spread of 44.5p to 45p, I continue to rate Communisis' shares a hold for recovery.
Please note that I have published two columns today, and nine in total last week, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past two weeks:
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 Nov 2015)
■ Getech: Sell at 38p ('Getech warns', 3 Nov 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 Nov 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 Nov 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 Nov 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 Nov 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 Nov 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 Nov 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 Nov 2015)
■ Trifast: Buy at 116p, target 140p ('Engineering a chart break-out', 12 Nov 2015)
■ Software Radio Technology: Speculative buy at 23.5p, target 40p ('Break-even beckons', 12 Nov 2015)
■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 Nov 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 Nov 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
