Novus Holdings is seeing its skinny margins in its core printing business being shredded by the high cost of sourcing short-in-supply paper.
And there’s not much the printing and packaging group can do about it. Speaking at the group’s AGM on Friday CEO Neil Birch said Novus faced a perfect storm with international mills — now suffering under an ongoing energy crisis and supply chain hitches — not able to supply enough paper to meet local demand.
Mondi’s SA mills, which in previous years supplied paper to Novus, no longer supply newsprint to the local market, and Sappi does not have the capacity to meet local demand. Birch said Novus is looking for Sappi to provide some tonnage allocation to it. “It’s very tough. We are in toe-to-toe discussions to get new supply arrangements.”
The paper shortage has meant paper prices have soared by 50% and, in some cases, as much as 80%. Birch said Novus had seen increases of close to R5,000 a tonne for paper.
He said for the interim Novus was subsidising customers, and this would likely see the printing segment — which generated revenue of R2bn and operating profit of R156m in the year to end-March — incurring losses in certain divisions. He told Business Day, though, that the full print segment was unlikely to trade below break-even in the financial year ahead.
Birch said there was a limit how long Novus could subsidise its client base. “Things remain very unclear as to paper supply — especially in light of the ongoing energy crisis [in Europe]. But at some point we will need to increase prices and talk to our customers. Without an increase in paper volumes, publications will die.”
The timing of the paper supply crisis is unfortunate for Novus, which has streamlined and improved its operations in recent years. Birch noted: “If we had not had this paper supply challenge, we would have been shooting the lights out.”
While the printing segment might see red ink in the current financial year, there is clear enthusiasm from Novus’ board to the proposed acquisition of three quarters of the local UK-based education giant Pearson SA’s courseware business for R829m. Pearson holds two well-known education book publishing brands in Maskew Miller Longman and Heinemann Longman as well as providing learning content and teacher training across schools, colleges and tertiary education.
London Stock Exchange-listed Pearson has been dramatically restructuring its core operation, and has sold off a number of education assets around the world.
Birch said Pearson not only allowed Novus to play in a space it had competence in, but also opened up the group to new opportunities. “As you learn more about the (education) market, more opportunities will present themselves.”
SmallTalkDaily analyst Anthony Clark suggested at the AGM that the Pearson deal could be the first step in Novus evolving into an annuity type income business. “Surely in a few years Novus could be sitting with a sizeable pot of cash again?”
Birch conceded that cash flow would be good, but stressed that Novus would be careful and focused in deploying capital into acquisitions. “We certainly don’t have any intentions of becoming an industrial holding company.”
In the year to end-December, the Pearson SA assets managed bottom-line profit of R260m, and generated a ROE (return on equity) of about 40%. Novus’s share in Pearson SA’s bottom line would have been R195m — more than double the R93m earned by Novus in the year to end-March.
Opportune Investments chief investment officer Chris Logan estimated that Pearson could be earnings enhancing for Novus by as much as 50c a share. Birch responded” “We will share that in the future.”
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