Captain Kirk strikes soft patch

David Kirk hit a pig on Thursday and it had nothing to do with rugby.

Since taking a $1.3 million gig two years ago running the Australian printing group and notorious stockmarket dog, PMP, Kirk has engineered a remarkable turnaround in the share price.

When he started in March 2003, PMP - which has printing contracts for some of Australia's leading magazines, The Yellow Pages and huge volumes of catalogue work - was floundering around 40c.

In February PMP hit a high of $2.35, and to top all the good news, Kirk was named "leader of the year" two weeks ago at the inaugural Human Capital Awards, backed by The Australian newspaper.

On Thursday, everything changed.

Kirk spooked an already jittery stockmarket with an earnings downgrade which wiped 25 per cent off PMP's share price and more than $120 million off its market value. PMP initially hit $1.20 before closing the day at $1.40. It closed yesterday at $1.41.

The catalyst for PMP's market rout was Kirk's disclosure to the Australian Stock Exchange that 2004-05 earnings would come in between $70 million and $72 million, up to 17 per cent below its forecast earnings range of $84 million to $90 million. It revived PMP's shocking reputation for earnings downgrades and losses.

PMP posted a $500 million loss in 2000-01 under previous chief executive Bob Muscat, who presided over a share price collapse during his tenure from $2.50 in 1998 to 42c when he left two days after Kirk started.

Kirk has managed to woo a PMP-wary market during his time in the big seat with a major restructuring and better-than-expected results in 2003-04, and a first-half figure in 2004-05 which looked promising.

PMP's ebit in 2003-04 was up 38.9 per cent to $74.7 million, higher than most analysts had forecast.

The printer fostered continuing bullishness last year when Kirk said earnings growth would march on into 2004-05: "We are comfortable with the mid-point of market expectation for our [2005] first-half ebit in the range of $47 million to $52 million," he said last year.

And true to his word, PMP posted a $51.3 million result for the six months to Decemberlast, further convincing analysts that PMP had become less volatile under the former All Black captain.

The bad news, however, started again for PMP in February when Kirk flagged earnings would be at the lower end of the market consensus range of $84 million to $90 million, because of a decision to accelerate installation of new presses at a cost of $124 million. The move meant PMP would temporality lose capacity and revenue in the second half.

PMP's share price hit a high of $2.35 on Valentine's Day, but after Kirk's first earnings clarification in February, PMP settled back to around $1.80.

Then came the dramatic earnings revision on Thursday, and this from Kirk: "We are simply not able to process the volume of work in the six-month period we had previously forecast. In addition, we continue to see lower gross margins in print as a result of a higher share of contracted magazine and major retail work and less capacity available to produce high-margin spot work."

Exactly what the market did not want to hear, although when the new presses are installed in September, Kirk said PMP would "achieve significant operating cost benefits and have new capacity available to sell in the busy Christmas period."

There is some conjecture in the market as to just when PMP knew the state of its capacity restraints; a point Kirk tackled this week.

"While earnings were moderately behind forecast in the January to March quarter, it was not until a full re-forecast was concluded for the April to June quarter that it became clear the company would have to revise down the year-end forecast."

Some are still to be convinced.

In the end, the PMP boss figures the present figures are a blip on his company's return to form.

"PMP continues to make solid progress in a wide range of initiatives to improve the business," Kirk said on Thursday. "Lower earnings in this six-month period are mostly a consequence of actions required to set the business up for future success."g

Here's hoping, otherwise Kirk will need more than a slippery sidestep to dodge a herd of snorting shareholders.

* Paul McIntyre is a Sydney journalist