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Printing.com is consolidating the fragmented on demand printing sector

Printing.com runs a network of franchised and ?bolt-on? franchised high street stores, as well as company-owned stores, that offer printing services to small and medium-sized enterprises

In times of economic uncertainty it makes sense for investors to back companies that have robust business models and to make sure that shares in these firms are protected from the vagaries of the stock market with either a healthy balance sheet or well-covered dividend payments.

On-demand printing company Printing.com looks like having all of these features. Its franchising-based business model exploits a printing ?hub? concept that keeps production costs low, while balance sheet cash of £2.7 million and a dividend yield of 5.9% both suggest limited downside risk to Printing.com?s shares. And these shares, at 42.25p each, are currently trading at only 6p more than their low for the past 12 months.

Printing.com runs a network of franchised and ?bolt-on? franchised high street stores, as well as company-owned stores, that offer printing services to small and medium-sized enterprises (SMEs) and home office-based customers. Franchised stores are Printing.com-branded and each of these sits within a territory where bolt-on franchises can be granted to established printers, copy shops and graphic designers. It is the responsibility of each franchised store to seek out and support new bolt-on franchisees that can be added to Printing.com?s network of outlets.

Printing.com?s hub concept means that all printing work is carried out at a central production site in Trafford Park, Greater Manchester. This gives the business the advantage of getting the maximum use out of its printing equipment, while any maintenance issues are all dealt with at one location ? so saving on costs.

All the customer has to do is place his order at his local store (or online via Printing.com?s Web site) and, depending on the quantity and type of work commissioned, the company dispatches the ordered products from Trafford Park to the store (or direct to the customer) within three to ten days.

The workflow is managed using Printing.com?s proprietary software: Flyerlink. This software, which is used by each one of the company?s outlets, prioritises which jobs need designing first and which orders are approved for printing. It is also linked to the company?s carrier, giving outlets control over when and where the finished goods are delivered.

Meanwhile, Flyerlink enables the interrogation of commercial data to provide management information such as value-added profitability by sector and other key performance indicators.
The total number of stores connected to the Printing.com network has grown from 82 in August 2004 (when the company joined the Alternative Investment Market) to around 250 today. But while Printing.com operated 11 company-owned stores four years ago it retains just two today for training and development purposes, preferring to rely on the franchised store network for growth.

The franchise-driven business model has been designed to reduce risk as the company?s network has expanded. Franchising, particularly bolt-on franchising, means that Printing.com insulates itself from the costs that are normally incurred during the initial stages of the opening of a new outlet.

The rate of growth in outlets connected to its network shows that Printing.com?s franchising strategy is working as the company seeks to become a major player in the on-demand printing sector. In the UK this market is estimated to be worth more than £2 billion (far greater than Printing.com?s expected turnover for this year of around £15 million), so there is more than enough room for the business to continue its expansion.

With the exception of Kall Kwik and Prontaprint the on-demand printing sector is highly fragmented, being made up largely of small independent businesses. This means that the company?s exploitation of economies of scale ? thanks to its hub concept and Flyerlink software ? gives it a huge advantage over most of its competitors in terms of cost. For example, Printing.com offers full-colour printing for such items as business cards, letter heads and leaflets at prices that rivals still struggle to compete with when selling only two-colour equivalents.

Indeed, the ability to take advantage of Printing.com?s low cost printing model is a selling point in getting bolt-on franchisees to join the company?s network. Bolt-on franchisees are able to carry on selling the printing and design services they have always offered while using Printing.com?s branding, technology and production system to sell full-colour printing at the same low prices offered by its franchised and company-owned stores.

Additionally, Printing.com?s low prices should provide some protection to its business in the event of a prolonged downturn in the UK?s economy as SMEs become more sensitive to costs.

But despite concerns about a downturn, Printing.com appears to be very well positioned since it is the colour printing segment of the on-demand printing industry that has been driving the sector as a whole in Western Europe. Meanwhile, the volume of print in Western Europe that is submitted through a Web-to-print system is expected to more than double between 2007 and 2010 (source: InfoTrends), and this should benefit the online side of Printing.com?s business.

Beyond the UK and Ireland, Printing.com has transplanted its business model to New Zealand through the granting of an ?International Master Licence? that allows a local printer to use the company?s systems and Flyerlink software in return for royalty payments. Closer to home, it has also invested in five French franchisees ? from which it expects to generate a positive contribution this year.

Encouraged by the progress in France, Printing.com intends to launch a similar initiative in Australia by the end of this year, although due to the impracticality of shipping from Manchester a third party production partner is being sought.

Recently, the company launched a new initiative called Network Partners. This programme allows third-party vendors of personalised promotional merchandise to market their products (such as pens, mugs and work apparel) to Printing.com customers in return for royalty fees.

At the moment, investors are waiting on Printing.com?s full-year results for the year to 31 March (due on 9 June). These are expected to reveal pre-tax profits of between £2.3 million and £2.5 million (2007: 2.3 million) on revenues of around £13.4 million. This year, pre-tax profits are expected to come in at around £2.8 million, which translates to earnings per share of 4.2p.

So, Printing.com?s shares are currently trading at a price-to-earnings ratio of about 10 times. This, together with the high dividend yield and healthy balance sheet, means house broker Brewin Dolphin?s 63p target price for the shares looks achievable.


Quick facts: Grafenia Plc

Price: 4.5 GBX

Market: AIM
Market Cap: £5.11 m

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