Yorkshire-headquartered print and marketing communications venture Communisis is demonstrating the positive benefits of its recent turnaround under margin-focused CEO Steve Vaughan. James Crux reports

Taking over in the hot seat in October 2006, energetic CEO Steve Vaughan inherited a rather uncoordinated, disorganised business at a low ebb. On arrival, he was forced to report a swing into the red to the tune of £19.4 million for 2006, after restructuring costs and asset write-downs.

However, since 2007, his turnaround mission has revitalised the fully listed business, focusing the company on the delivery of higher-margin, added-value services and away from high-volume, low-margin ‘commoditised’ activities associated with traditional print.

Under Vaughan, the company has upped its game in terms of cross-selling services across what is a blue-chip client base and is now more profitable, efficient and strong of balance sheet.

As a consequence, Communisis is now well positioned to emerge from the current downturn in robust shape. And for investors, its lowly stock market rating means the shares are selling for a keen price and now come with substantial dividend yield appeal.

Strategy
Vaughan better defined Communisis’s mission, which is to help clients communicate in more effective ways, saving them money and creating more profitable relationships with their own customer base. Services range from print and document management to statement and billing outsourcing, and from direct mail and business forms services to marketing process consultancy. Significantly, Communisis is also Europe’s leading producer and supplier of cheques, credits, clearing vouchers and dividend mailings, entrusted by numerous blue-chip financial services institutions.

Stage one of the turnaround involved ‘sticking to the basics’ and customer focus. From mid-2007 onwards followed stage two, where the focus moved on to cross-selling and migration towards higher-margin services. The third stage of the recovery, beginning in mid-2008, involved the integration of these high-value services in a way that meaningfully addressed clients’ needs.

Vaughan insists that the company shifted its ‘centre of gravity’ higher up the value chain in 2008, through measures such as the sale of its commoditised Bath Business Forms business, whose growth prospects were limited, to management for £12.8 million. This resulted in a cash inflow of £8.2 million, bolstering the balance sheet and further improving the group’s earnings quality, as did the exit from a print management deal with Sainsbury’s, which stripped out low-margin outsourced volume from the business mix.

Simultaneously, recent investment has been channelled into higher-margin areas such as digital print, with the clear example being December’s acquisition of high-value data services business Ai (Absolute Intuistic) for up to £12.6 million in cash.

The profitable Ai boasts technology that enhances the direct marketing efforts of clients including BT and Lloyds TSB, helping them target the most attractive prospects and build ties with the most profitable, lowest credit risk customers. Having grown rapidly in recent years, this acquisition could prove an astute one, with Ai now beginning to clinch large long-term deals under which it provides all of a client’s data analysis requirements.

‘We sold a commoditised business to management and we bought a business in data analysis,’ enthuses Vaughan, who says the various parts of the group are now working far more effectively together. He has made sure the company has an ‘integrated’ sales offering and a stronger proposition for the market. The early fruits of this push were seen last year, with the number of clients buying more than one service rising from 24 to 32.

Given the current economic backdrop, cash is indeed king and credit for much of the recent turnaround in financial fortunes must go to finance director Peter King. His cash collection efforts, allied to disposal proceeds, helped the company halve net debt last year to £13.1 million. Moreover, lending facilities, now totalling £40 million, have been renewed, giving Communisis the financial firepower to act on acquisitive opportunities created by the current economic distress.

Management
Communisis’s lively leader, the fast-talking business change specialist Steve Vaughan, was previously chief executive of IT services business Synstar between 2001 and 2005. Taking over the loss-making computer maintenance specialist, he turned it around, added higher-margin bits to the business and grew its share price before its takeover by US computer giant Hewlett-Packard. Before Synstar, Vaughan held a number of senior roles at EDS, latterly as managing director of the UK industry division.

Overseeing developments from the chair is the seasoned Peter Hickson, a trained accountant appointed to the board in December 2007. The 63-year-old, also chairman of Anglian Water and a senior independent director of London & Continental Railways, brings gravitas to the board, having served as finance director of Powergen between 1996 and 2002 and previously acted as a non-executive director at Scottish Power from 2006 to 2007.

Peter King was appointed finance director in September 2006, having been financial controller. Previously, King was director of finance for Norwich Union Life, part of Aviva, for four years, following 11 years with KPMG.

Prospects
Though trading conditions in marketing and communications are tough, Communisis is well placed to weather the storms. Early signs of improvement in its prospects were revealed in the numbers for 2007, which showed a strong rise in profits from operations as well as improved cash flow and net debt reduction.

Announced in early March, the 2008 numbers were even more impressive, revealing a 61 per cent surge in pre-tax profits to £12.7 million (adjusted PBT rose from £7.9 million to £13.3 million) and £19.6 million of cash flowing into the business, allowing Vaughan to maintain the final dividend at 1.635p, thereby nudging up the total for the year from 2.453p to 2.495p.

Strong profits growth and a second successive year of bumper cash flow meant that net debt reduced from £26.3 million to £13.1 million, the lowest level in five years. And profits moved higher across the four key parts of the business in a tough 2008.

Within direct mail and business forms (the part of the business most exposed to recessionary pressures), profits sparked up by 55 per cent to £5.5 million, with margins doubling, thanks to stewardship of the business towards higher-value services and the Bath disposal. However, it would be unbalanced not to flag up the fact that trading within direct mail deteriorated from September onwards, and it was downturn here that caused analysts to pare back their forecasts.

Prospects are further underscored by the increasingly diverse nature of the client base, which spans many sectors, from financial services and retail to government and utilities. And Vaughan adds that the long-term nature of many of the company’s contracts lends further insulation from recessionary ravages.

Valuation
Although estimates for 2009 were downgraded in the wake of the results, for 2010 a return to growth is predicted, with profits of £11.7 million pencilled in, producing earnings of 5.9p. The expectation in the market is that the dividend will be maintained at 2.5p this year and 2.56p next year.

On those estimates, the shares are swapping hands for only 5.5 times this year’s earnings and 5.1 times next year’s, which suggests that the difficult short-term outlook has been more than priced in by the market already.

Furthermore, that price decline means investors can buy into shares yielding a very healthy 8.3 per cent, only adding to their attraction in the current low interest rate environment. With the house broker targeting a 45p share price, there is plenty of upside for investors buying in at current levels.