Plastics Capital has announced a set of full-year results which are in-line with our expectations. The company added that it expects to make good progress over the next year as it continues to invest for future growth. Since initiating coverage in February 2010, the niche plastics products manufacturer's share price has risen by more than 200%, which compares to the market's (FTSE All-Share) return of just 20%. With global activity showing signs of improvement, we feel that the company has the potential to reap even greater returns for investors and, accordingly, we reiterate our buy recommendation.
Financials: In-line with forecasts
For the twelve months ended 31st March 2012, Plastics Capital revealed an underlying pre-tax profit of £3.8 million (FY2011: £3.9 million) - which is exactly in line with our forecast - as revenue declined slightly by 4.2% to £32.1 million. On a like-for-like basis (adjusting for exchange rates), organic revenue decreased by a moderately lower figure of 3.8%. As the company had previously mentioned, the business was negatively impacted by the weak global economic environment, the two natural disasters (the Japanese tsunami and the Thai floods) and overstocking issues. At the same time, good new business generation (£2.3 million has been recorded in FY12 and £5.4 million will be recorded gradually over the next three years), excellent cash-flow management and lower interest costs have positively contributed to the top and bottom lines.
The gross profit margin was maintained at around 38% as increased raw material prices were offset by more favourable foreign exchange rates. The company was hedged at an exchange rate of $1.55, which compares to $1.64 on a year earlier. We feel that the organic development of the business will provide good returns for shareholders over the mid-term, and were therefore pleased to hear that it has continued to invest in business development activity and maintained operating costs.
The group's financial position remains healthy, with net current assets of £2.3 million and net assets of £19.4 million. The company has been able to reduce its net debt position by £2.2 million to £10.1 million through continued strong cash generation. Interest cover at the end of the period stood at a healthy 9 times and net leverage at 2 times. During the financial year, the group refinanced its debt, extending the maturity to June 2015. The cost of the new facilitates – which incorporate an £8 million revolving credit facility and £6 million amortising term loan – is about 450bps, after hedging arrangements.
The resilient operational performance, combined with the debt reduction, has allowed Plastics Capital to recommend a final dividend of 0.67p, bringing the total dividend for the year to 1p per share. This is well covered (10.1 times) by adjusted basic earnings of 10.1p. We expect to see the group progressively increase dividends in line with its dividend policy over the coming years as its balance sheet continues to strengthen.
Divisional breakdown
BNL (UK), which manufactures plastic bearings and other rotating parts, had a reasonable year when considering the difficulties experienced by its Japanese customers following, first, the Japanese tsunami and, then, the Thai flooding. It achieved sales of £12 million, down 3.5% on last year. However, it reported five new key accounts and converted new business which will lead to £2.4 million in additional annual sales over the next three years. With 20 high priority projects with a potential annual sales value in excess of £7 million currently in the design process, we feel that BNL has good potential for long term growth.
Bell Plastics, which manufactures hydraulic hose mandrels and films, posted an 11% drop in revenues to £3.3 million, primarily as a result of the economic crisis in Europe. Nevertheless, the division has now modified its business model in a way that has enabled it to improve both the likelihood and conversion of enquires from a wide variety of hose makers in different parts of the world. Given our view of the global economy (see below), we expect to see increased sales from Bell Plastics going forward.
C&T Matrix, which manufactures creasing matrix, a consumable used by packaging manufactured to crease cardboard, reported sales of £5.5 million, down from £6.5 million. This was due to overstocking issues at distributors in the prior financial year; the introduction of some new production planning procedures to improve delivery reliability and lower temporary and overtime labour costs; and the restructuring of its distribution relationships in Italy and Brazil. Nevertheless, the overstocking issues have now been rectified and early indications are that C&T will achieve better results in the mid-term. We expect to see further new development, which, we feel, will enable C&T to make good progress in FY2013.
The specialist film packaging business Palagan achieved a 2% rise in revenues to £11.3 million but a 3% decline in volumes. This reflects the annual average movements in raw material prices. We feel Palagan is more than capable of taking a larger share of the market. We also believe that the first half of FY2013 is likely to see falling polymer prices and margins improving slightly. All this bodes well for Palagan.
Chart: Revenue breakdown
Outlook: Positive
The company has performed in-line with our expectations since the year-end and we believe that, driven largely by new business already won and the initiatives to introduce new products and to win customers, demand will gradually improve over the course of the financial year and beyond.
In terms of specific objectives for FY2013, we believe that the group has the potential to add another 20 key accounts while also further developing its existing key accounts. We expect to see new business contribute 5-10% to the top line. We also see geographic expansion, with the main focus being in China and other developing markets, such as Brazil, Mexico, Poland and India. Furthermore, we look forward to the introduction of new products and capital investment to support new product development and to provide for additional production capacity.
With acquisition growth being an important component of the group's strategy, we note there are currently a number of acquisition opportunities being pursued.
Developments in the world economy
We are pleased to see that there has been a gradual pick-up in global activity. According to provisional estimates from the European Central Bank, quarterly Gross Domestic Product (GDP) for the OECD area grew by 0.4% in the first quarter of 2012, up from 0.3% in the previous quarter. This is consistent with the OECD's composite leading indicator (CLI). In the main emerging markets (except Russia), the CLIs have also strengthened further. The results of the Ifo World Economic Climate Indicator also suggest that the trend towards a recovery in the world economy is continuing. The improvement in the index was driven primarily by more positive expectations for the next six months, while the current situation was also deemed somewhat better than in the last survey.
Consequently, with revenue at Plastics Capital broadly driven by the level of global economic growth, we are encouraged by what may lie ahead.
Evaluation and forecasts
As mentioned above, we expect to see the £5.4 million of new business that has been won but has not flowed through to revenue to be recorded gradually over the next three years. We also anticipate revenues increases being spread across all divisions more equally. Consequently, we continue to forecast an adjusted pre-tax profit of £4.1 million on sales of £33 million for FY2013. Adjusted EBITDA is forecasted to come in at £5.4 million, while net debt should decrease further to around £7.8 million.
We believe that a 2013 EV/EBITDA multiple of 7 times is appropriate to value the shares given the solid performance reported for the full-year just gone, the cash-generative nature of the operations and the steadily falling level of borrowings. According, we have increased our target price to 109p and maintained our buy recommendation.
Financial records & forecasts
Year to 31st March | Sales (£m) | PBT* (£m) | EPS* (p) | EBITDA* (£m) | DPS | Net debt (£m) |
2010A | 26.7 | 3.0 | 8.0 | 5.1 | 0.0 | 16.1 |
2011A | 33.5 | 3.9 | 10.2 | 5.8 | 0.0 | 12.3 |
2012A | 32.1 | 3.8 | 10.1 | 5.0 | 1.0 | 10.1 |
2013E | 33.0 | 4.1 | 11.2 | 5.4 | 1.0 | 7.8 |
Source: GECR
*Excluding amortisation, exceptional costs, unrealised foreign exchange translation and derivative gains/losses.
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