Pacific Brands (PBG)

By Jason Fittler

PBG manages some of Australia's strongest consumer brands.

Most products have strong positions in competitive and moderate growth segments. Operations are not capital hungry, allowing reasonable cash flow. The Pacific Brands 2010 strategy is an aggressive attempt to cut costs, especially the fixed costs of manufacture, and to reduce complexity. The number of product lines will decline by two thirds.

Management expects annualized cost savings of $150m by the end of FY11. The disruption to manufacturing as production is transferred overseas may delay realization of targeted cost savings.

Fair value is $1.60.

We use a relatively high discount rate of 11.2% in our discounted cash flow to reflect the uncertain outcomes of the restructuring campaign. Longer term revenue growth will likely keep pace with GDP.

Sales fell nearly 10% in first half 2011, but the result was 2% better than our expectation.

The discontinued businesses and brands accounted for much of the sales drop, the soft retail environment also contributed.

While the cost cutting efforts will improve earnings before interest and tax, (EBIT) we do not expect to see the price move much from its current level of $0.77.

That said it is paying a massive yield of 10% as such happy to hold for the income and long term recovery.

For more information on Pacific Brands (PBG) please contact us on 07 4771 4577.