PMP Limited (PMP-AU) 5 September 2017 Synergies on Target, Cash Flow set to Ramp

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1 PMP Limited (PMP-AU) 5 September 2017 Synergies on Target, Cash Flow set to Ramp Adam Dellaverde adellaverde@taylorcollison.com.au Summary Market capitalisation ($m) $359.3 Share price $ week high $ week low $0.61 Ave Daily Vol (year rolling) 0.224m Key Statistics (A$ million) Period FY17 Act. FY18 Est. FY19 Est. Revenue ($m) 1, Adj. EBITDA ($m) Adj. NPAT ($m) Adj. EPS DPS (c) Adj. PE Ratio n/m PB Ratio Div Yield n/a 6.2% 11.6% Franking n/a 0.0% 0.0% Payout ratio 0% 100% 100% EV ($M) EV/Adj. EBITDA (x) EV/Adj. EBIT (x) Share Price Graph (A$) $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 Investment Thesis Outperform $0.71 A recent wave of industry rationalisation has reduced the number of large commercial printers down to two, with PMP the largest at approximately 60% market share. Our channel checking suggests both remaining operators are running at or above 100% utilisation heading into Christmas. We d expected this dynamic to at a minimum to ease deflationary price pressures and possibly drive selective price increases. Instead, we have observed IVE Group (IGL-AU), PMP s main competitor, aggressively pursue market share using (rumoured) price leadership strategies. After a spending spree approaching $200m including M&A and new equipment, IVE threatens to reintroduce the ~25% industry capacity eliminated in the recent round of mergers. In many ways, this is the main variable dictating the future earnings power of PMP. Independently, PMP has done an excellent job on merger synergies and is on track to generate FY19 EBITDA of $90- $100m and recommence dividends in FY18. EBITDA cash conversion should be excellent given modest capex requirements and a decade of tax losses. At face value, the current market cap of $380m is too cheap for a business generating this much cash. Uncertainly lingers around whether the $90-$100m EBITDA number can be sustained beyond FY19. This comes back to IGL. If new capacity being brought on by IGL is mostly directed towards press rationalisation and productivity, we see PMP s $90-$100m of EBITDA as sustainable with the help of gradual yield and capacity tweaks over time. If IGL revert to market share pursuit, we see around $20m of EBITDA downside for PMP based on IGL s latent capacity. We think this is the limit of downside since IGL are unlikely to invest in further presses. Either way, we expect PMP to remain highly cash generative for the next half-decade with excellent prospect for a return of capital for present shareholders and upside if competition is rational. Valuation & Recommendation We have slightly modified our estimates to reflect restructuring cost timing and new revenue recognition methodology starting in FY18. The majority of this EBITDA will be free cash flow from FY19 based on tax losses carried forward and modest capex needs. PMP is trading on a FY19e EV/ Adj. EBITDA multiple of 3.5x. By comparison, competitor IVE trades on a FY19e EV/EBITDA multiple of 4.7x. Both businesses are navigating merger integration risks. We see no reason for PMP to trade at a discount. Our target price remains at $0.90 representing 5x FY19e EV/EBITDA. We maintain our Outperform recommendation.

2 PMP Limited Page 2 of 6 Earnings discussion Management described the first part of FY17 as stalled due to uncertainty around industry structure changes and incumbents fighting hard to hang onto customers ahead of potential change of control transactions. Unfortunately, some of what we would deem as irrational pricing behaviour seems to have continued post-industry consolidation, although there is suggestion that pricing on recent contract wins was negotiated from pre-merger days. We view the major risk to PMP as the behaviour of IVE Group (IGL-AU) which has recently succeeded in luring Coles and Pacific Magazines contracts from PMP/IPMG. Both operators have large shareholders exerting operational influence, with much to lose in terms of personal wealth should price-based competition continue. Magazine and catalogue mediums, whilst important marketing channels, remain in a state of decline. Shrinking volumes are expected to progressively recreate overcapacity issues for commercial printers. It remains to be seen whether, as duopolists, they adapt to remove capacity in line with demand attrition or revert to the old-style destructive pricing wars of years past. We have been surprised by the market share focussed strategy deployed by IGL, which has coincided with material investment in new equipment. IGL are currently in the process of deploying >$50m of new equipment in addition to roughly $130m spent on acquiring Franklin and AIW. New equipment, once installed, arguably offsets much of the gains achieved by PMP in removing excess industry capacity. IGL s first press should be operational in mid 1H18, with its second press targeting a FY19 install. Even with the first new press operational we see both IGL and PMP near-maximum capacity utilisation. Given this state, we d be surprised to see any further priced-based competition before FY19. Thereafter, much hinges on whether IGL utilises new equipment for rationalising its own press fleet, or continued pursuit of market share gains. If it s the latter, we would expect the industry to return to price destructive tit-for-tat competition. FY17 included a full period contribution from an enlarged G&G and part period contribution from IPMG business units. Setting contributions from these areas aside, numbers almost uniformly were disappointing. Australian distribution volumes were down 12%, or 6% if you exclude Dick Smith and Masters (both retailers closed during FY17). Industry catalogue volumes were down 7.3%, or roughly 4% adjusting for large retailer bankruptcies. Overall revenues declined by 7.7%. Griffin Press, tonnes fell by 18% due to contract losses, with a difficult near term outlook. Print Australia struggled pre-merger and conditions are expected to remain difficult. Many retailers are controlling marketing costs through format changes/pagination reductions, while magazine publisher print runs continue their decline commensurate with advertising and circulation falls. Small and mid tier retailers seem to be pulling back the most in this environment with large retailing groups tending towards expanding their catalogue programs. New Zealand sheetfed sales increased 2%, heatset volumes declined 2.5% and distribution volumes were 1% lower. The NZ market continues to struggle with sell price deflation and reduced volumes, with PMP writing off goodwill associated with this business in FY17. Significant items reconciliation Significant items if $142.6m were classified as follows: Restructuring initiatives $53.6m Impairment of PP&E $36.1m Impairment of Intangibles $24.6m Onerous lease provision $20.0m Acquisitions costs $8.0m Other $0.3m

3 PMP Limited Page 3 of 6 The net tax benefit of from significant items was $18.1m in FY17, resulting in after-tax loss from significant items of $124.5m. Of the restructuring initiatives, $47.1m was related to employee redundancy costs. The majority of significant items were non-cash in nature, including $60.7m of asset impairment and $20m of onerous lead provisions (the latter will gradually turn into cash expenses over the life of the lease unless re-let). FY17 included roughly $62m of cash restructuring costs, although $6.7m of these cash items occurred in the first half prior to the the merger approval. $10m of the $62m is actually provisions that will pay out in cash during FY18.This compares to latest guidance for $75m of one-off cash restructuring charges. Based on this information we estimate FY18 will include a further $20m of cash restructuring charges, most of which will occur during the 1H. We are niot forecasting any restructuring charges in FY19. Source: PMP-AU Presentation Materials During FY17 11 presses were decommissioned removing approximately 60,000 tonnes of capacity from the market. This roughly equates to 25% of the pre-existing capacity of PMP/IPMG. The new manufacturing footprint was operative from July. Management believe roughly $40m of cost savings will flow in FY18, while FY15 will benefit from the full $55m of post-merger synergies. Margins & Revenue Policy Change One of the major attractions of a PMP/IPMG tie-up was the ability to migrate work from older presses onto newer, more efficient equipment while also improving the utilisation of this equipment. This is a non-linear benefit since faster, wider machines can handle more revenue per labour or machine hour. We ve already started to observe benefits in 2H17, with GP margins rising to 36.3% up from 33.3% in 1H17. This is outside of the usual pattern where 1H has better GP margin due to higher machine utilisation during the busy Christmas season. GP margins will materially change again next year due to a change in accounting policy for Gordon & Gotch. From FY18 PMP will only include as revenue the portion of the magazine sales price it takes as commission. Previously the entire magazine price was included as revenue for G&G. This will have a cosmetic effect of showing improved margins, although from an economic perspective there will be no change. This accounting change affects both the Gordon & Gotch Australia segment revenue line and the New Zealand revenue line, since G&G NZ is included in that figure. We are expecting GP margins to rise between 60-65% in FY18 based on new accounting measures. Financial Position Bank debt is forecast to peak at $65m in November 2017 (1H18) corresponding to a peak period for working capital ahead of Christmas. This should unwind in 2H18 and we expect PMP will be in a position to fully amortise this facility in 2H18, should they elect to do so. We note that the facility is currently structured to expire in February 2018 although management may seek to extend the facility to cover the November period in 2018 to provide headroom for capital management.

4 PMP Limited Page 4 of 6 PMP is also financed through unsecured notes ($40m of face value) which are due in September These notes offer early redemption as follows: 17 September 2017 at a 2% premium to face value. 17 March 2018 at a 2% premium to face value. 17 September 2018 at a 1% premium to face value. 17 March 2019 at a 1% premium to face value. Based on our estimates, the earliest redemption is likely to occur would be in March We note the 1% penalty would equate to roughly $0.4m as compared to interest savings of roughly $1.3m arising from early repayment in March Accordingly, we think there is a profit incentive to retire these notes early if in a position to do so. We are modelling this outcome in our estimates. One of the financial covenants for the notes is the limitation on dividends up to 100% of underlying NPAT for the group for any financial year. PMP s D&A expense (~$32m estimated for FY18) dwarfs its capex guidance of $5-10m annually. Additionally, PMP carries >$200m of Australian tax loss credits, meaning any accounting tax expense will not require a cash payment for the foreseeable future. These factors dictate that PMP s freely distributable cash flow should materially exceed underlying NPAT, thus a dividend payout ratio >100% is perfectly feasible once the notes have been retired. We see PMP as on track to return to a net cash position by year-end 1H19 whilst also paying out 100% of underlying earnings in dividends until unsecured notes are retired in 2H19. At year end there were $62m of surplus franking credits available for future dividends. Guidance Latest guidance has been reiterated: FY18 EBITDA pre-sigs $70-85m. $90-$100m EBITDA pre-sigs for FY19. Capital management recommencing in FY18. Net debt free in FY19. Net debt at year-end was $18.5m; $26.5m ahead of guidance. This was achieved due to lower capex and redundancy costs, with net debt now expected to peak at $60-65m in November. Management outlined an expectation for resumption of capital management in 2H18. Our understanding is that this was intended to be interpreted as resumption of both interim and final dividends in FY18 (an interim dividend would be paid in 2H18). We view share buybacks as unlikely herein due to register concentration and liquidity concerns. TC Estimates We have updated our sales forecasts based on visibility into first four months of trading from IPMG (in FY17) and guidance for incremental FY18 revenue contribution net of contract losses. Revenue and gross profit estimates have been affected by change in revenue recognition policy at Gordon & Gotch. This is a cosmetic change and does not impact EBITDA. Modified our estimates for restructuring costs, mainly around timing of recognition in the P&L and timing of release through provisions. Incorporated new expectations for debt repayment and dividend recommencement.

5 PMP Limited Page 5 of 6 Taylor Collison Research PMP Limited - Summary of Forecasts PMP $0.71 PROFIT & LOSS SUMMARY (A$m) BALANCE SHEET SUMMARY P e riod FY 16 E FY 17 A FY 18 E FY 19 E P e riod FY 16 E FY 17 A FY 18 E FY 19 E Total Revenue , Cash CODB (769.3) (1,025.4) (644.4) (586.0) Receivables Adj. EBITDA Inventories Dep'n Other Amort'n Total Current Assets Adj. EBIT Property Plant & Equip Net Interest (5.1) (4.4) (7.6) (3.7) Intangibles j.v./assoc. income/(loss) DTA Adj. P re - Ta x 17.0 (1.4 ) Other Tax Expense (5.2) (0.5) (9.6) (18.0) Holdings in j.v./assoc Minorities Total Non- Current Assets Adj. NPAT 11.8 (1.9 ) TOTAL ASSETS Abnormals post- tax (11.6) (124.5) (14.0) 0.0 Accounts Payable Reported NPAT 0.2 (126.4 ) Borrowings Provisions PER SHARE DATA Other P e riod FY 16 E FY 17 A FY 18 E FY 19 E Total Current Liabilities EPS Reported. (c) 0.1 (33.3) Borrowings Adj.EPS (c ) 3.7 (0.5 ) Provisions Dividend (c) DTL Franking 0.0% 0.0% 0.0% 0.0% Other Dividend Payout Ratio (%) 96.6% 0.0% 100.0% 100.0% Total Non- Current Liab NTA per share (c) TOTAL LIABILITIES FCF per share (c) 9.8 (0.8) TOTAL EQUITY Weighted Shrs on Issue CASH FLOW SUMMARY KEY RATIOS Period FY16E FY17A FY18E FY19E P e riod FY 16 E FY 17 A FY 18 E FY 19 E Reported Profit 0.2 (126.4) Adj. EBITDA Margin % 6.1% 3.0% 10.1% 13.8% Dep'n & Amort'n Adj. EBIT Margin % 2.7% 0.3% 5.5% 9.4% Decr./(incr.) working capital (6.8) (6.0) Adj. NPATMargin % 1.4% - 0.2% 3.1% 6.2% Decr./(incr.) deferred taxes 3.5 (17.4) Adj. EBITDA Interest cover ( Decr./(incr.) provisions (9.6) (1.9) Adj. EBIT Interest cover (x) Other non- cash/ signif. items (4.6) 71.2 (0.2) 0.0 Net Debt to Adj. EBITDA (x) Gross Cashflows 33.5 (12.5) Gearing % (D/D+E) 0.2% 7.0% 3.2% % Net capex (1.8) (1.7) (5.0) (5.0) Acquisitions/(Divestments) VALUATION MULTIPLES Other investments (0.2) (0.2) P e riod FY 16 E FY 17 A FY 18 E FY 19 E Free cash flow 31.7 (3.1) PE Ratio (x) 19.3 n/m Dividends Paid (9.7) (7.6) (10.9) (34.6) Price to Book Ratio (x) Debt issued/ (repaid) (13.9) 11.0 (20.0) (41.5) Dividend Yield (%) 5.1% n/a 6.2 % 11.6 % Equity issued/ (buyback) (4.1) Adj. EV/EBIT (x) Net Cash Flow (7.8 ) 0.9 Adj. EV/EBITDA (x)

6 PMP Limited Page 6 of 6 The following Warning, Disclaimer and Disclosure relate to all material presented in this document and should be read before making any investment decision. Disclaimer: Warning (General Advice Only): Past performance is not a reliable indicator of future performance. This report is a private communication to clients and intending clients and is not intended for public circulation or publication or for the use of any third party, without the approval of Taylor Collison Limited ABN ("Taylor Collison"), an Australian Financial Services Licensee and Participant of the ASX Group. TC Corporate Pty Ltd ABN ( TC Corporate ) is a wholly owned subsidiary of Taylor Collison Limited. While the report is based on information from sources that Taylor Collison considers reliable, its accuracy and completeness cannot be guaranteed. This report does not take into account specific investment needs or other considerations, which may be pertinent to individual investors, and for this reason clients should contact Taylor Collison to discuss their individual needs before acting on this report. Those acting upon such information and recommendations without contacting one of our advisors do so entirely at their own risk. This report may contain forward-looking statements". The words "expect", "should", "could", "may", "predict", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of and guidance on, future earnings and financial position and performance are also forward looking statements. Forward-looking statements, opinions and estimates provided in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Any opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice and Taylor Collison assumes no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, Taylor Collison, its directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. Disclosure: The Analysts remuneration is not linked to the rating outcome in this research document. Taylor Collison may solicit business from any company mentioned in this report. For the securities discussed in this report, Taylor Collison may make a market and may sell or buy on a principal basis. Taylor Collison, or any individuals preparing this report, may at any time have a position in any securities or options of any of the issuers in this report and holdings may change during the life of this document. Analyst Interests: The Analyst may hold the product referred to in this document, but Taylor Collison Limited considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst holdings may change during the life of this document. Analyst Certification: The Analyst certifies that the views expressed in this document accurately reflect their personal, professional opinion about the financial products to which this document refers. Date Prepared: September 2017 Author: Adam Dellaverde Release Authorised by: Mark Pittman