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Note: At the time of writing, PPX shares were trading at $0.26, the following day Friday 13th May 2011 they tumbled 21.2% after the announcement of yet another loss for 2011.

Stock: Paperlinx

Stock code: PPX

Share Price: $0.26 (as at close of trade 12th May 2011)

Broker Sell Recommendations:

Paterson Securities (8th May 2011, share price was $0.275 that day)

Wilson Asset Management (8th November 2010, share price was $0.46 that day)

Chart

Chart: Share price over the year to 13/05/2011

Volatile commodity and currency prices have investors looking for safe place to put their hard earned money. As global demand has driven up demand for goods, raw material companies have done fairly well recovering from the lows of the global financial crisis. Unfortunately shareholders of PaperlinX have not seen the bounce that so many material and consumer stocks have had over the past year and half. In fact at .26 most PPX investors must feel like they are staring into the abyss right about now. Despite management’s best efforts PaperlinX is still trying to claw its way out of the global recession and it appears that time may be running out.

Description

PaperlinX Limited engages in the sales and distribution of paper and paper-related products to the commercial print, office, and display markets. The company sources, stocks, markets, and distributes fine papers; specialty papers; sign and display, and graphics solutions; and industrial packaging materials. It serves printers, designers, publishers, and advertisers, as well as sign makers and office market users. The company also provides paper converting, sheeting, slitting, and packaging services; and operates paper and graphics stores. It operates in the United States, Canada, the United Kingdom, Ireland, South Africa, Continental Europe, Australia, New Zealand, and Asia. PaperlinX Limited’s head office is in Mount Waverley, Australia.

Earnings

On May 13, PaperlinX management announced that volumes were significantly below last year and below its expectations for Europe and the United Kingdom. The soaring Australian dollar didn’t help matters for an already struggling PaperlinX, adding fuel to the fire that is engulfing this paper merchant.

PPX expects to report a full year statutory loss after tax for the 2011 financial year in the range of $23M to $30M, which includes an estimated non-cash valuation loss for a foreign currency option of approximately $14M after tax. This is improvement when compared to the after tax loss of $225M for 2010, but in reality the only way was up from that massive hit taken last year. Underlying earnings after tax for the 2011 financial year are expected to be a loss after tax in the range of $7M to $14M, after adjusting for the impact of the foreign currency option and discontinued operations versus an underlying loss after tax of $28M for 2010.

Possible impairment valuations will be considered at June 30, 2011. PaperlinX says that it will continue with its business restructuring program to remove costs and better align businesses to the new market conditions.

PaperlinX also advises that the maturity date of the company’s largest borrowing facility (in Europe) has been extended from May 2012 to September 2013.

Technical Picture

Image text: The expression “a picture paints a thousand words” comes to mind when taking a look at the daily chart of PPX. Not much to add here. MACDHistogram signalling downside momentum is increasing. Downtrend clearly in place for now. Market looks to be questioning the viability of PPX.

The expression “a picture paints a thousand words” comes to mind when taking a look at the daily chart of PPX. Technical traders can see that PPX is trading in long term down trend and may see clearly identifiable support levels. Any traders looking to take punt on the long side may be catching a falling knife. Downtrend seems to be in place for the now and the market looks to be questioning the very viability of PPX. The chart shows that many investors are simply running for the door.

Analysts

James Georges an analyst for Patersons Securities has a Sell Recommendation on PaperlinX. “This paper merchant remains leveraged to European and other struggling overseas economies,” says Georges. “Earnings are unlikely to recover until there’s an economic recovery in those markets. Its recent removal from the S&P/ASX 200 Index in the March quarter adds insult to injury. Avoid.”

Shane Oliver, head of investment strategy with AMP Capital opined that “that a strong Aussie dollar relative to the US dollar will hurt manufacturers that compete against importers, domestic tourism, fine-margin businesses and companies that compete internationally.” Oliver expects companies with large import bills, such as airlines and select retailers to be among key beneficiaries, while net exporters will struggle.

Chris Stott, head of research with Wilson Asset Management adds that included among net-losers to a strong A$, “will be stocks like Aristocrat (ALL) and PaperlinX (PPX) both of which earn significant chunks of revenue offshore.”

Conclusion

With expectation that the recent volatility in commodities and currencies are likely to continue, investors will have to continue to make investing decisions in a tough environment. This is especially true for the unfortunate shareholders of PaperlinX. The company is faced with difficult market conditions, rising raw material costs, and management’s inability to manage the business out of the hole it is in. Some daring punters may wish to have go at PPX, but given all the stated difficulties plus what appears to be ineffective management, you may be better off using your .26 to buy paper clips.

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