Lion Rock Group Limited
Lion Rock (‘Group’) is a Hong Kong-listed provider of printing services to international book publishers, publishing conglomerates, and print media companies. All of its revenues are generated outside Hong Kong with the USA, Australia, and UK contributing 85% of revenues.
The pandemic has severely impacted the book industry with customers
suspending or cancelling orders resulting in 25% lower sales in the last six
months compared to the previous period.
Further, the Sino-US trade spat has imposed additional tariffs on the
group’s production in China and Hong Kong. However, its Singapore subsidiary has
received additional orders to offset this. It has also increased investments in
a Malaysian subsidiary to further mitigate the impact of the tariffs. For diversification,
it has increased investments in its associate (and top five customer) - Quarto
Group, a leading non-fiction publisher incorporated in the USA and listed in London
– by purchasing stakes at quoted market value from an executive director.
The group reported sales of $1.4b (2019: $1.6b) and net profits of $104m
(2019: $139m). It generated average free cash flows of over $90m/year over the
last five years after investments in subsidiaries and associates. It had a net
cash position of $139m and healthy current and liquid asset ratios.
The stock is selling for $531m ($0.69/share) at 5x depressed earnings sporting
average free cash flow yields of about 17%/year.
Management have paid regular dividends of $70m/year but this dropped to
$31m in the last twelve months and the latest interim dividend was cancelled.
It had, however partially spun-off shares in a subsidiary worth $19.7m to
shareholders in the last year.
The near-term prospects are weak and any further erosion in sales will
have a disproportionate impact on the bottom line due to the high proportion of
fixed costs arising from the capital-intensive nature of this business.
We think, however, that this seems to be a reasonably well-managed and
shareholder-oriented group whose shares are underpriced even after considering
the impact of recent headwinds. There appears to be a sufficient margin of
safety for investors to withstand further adverse future developments.