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City brokers upbeat on Cambria Africa amid Millchem expansion

Published: 04:02 29 May 2014 EDT

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Millchem, a subsidiary of Cambria Africa (LON:CMB), has secured “an ideal starting point” for the further expansion of its chemical distribution business, according to broker WH Ireland.

Analyst Ian Berry says the deal to buy Chemicals & Marketing Company(C&M), a former ICI business, for approximately £300,000 (5.5mln Cambria shares), brings a solid asset base and facilities that provide ‘value adding’ potential.

In the last calendar year, C&M had sales of US$2.5 mln, and had earnings (before Interest and tax) of US$177,000.

It is expected that synergies from the acquisition will improve gross margins, whilst it also adds new suppliers, product lines and value-adding services. Cambria sees the bolt-on as a significant step forward for Millchem’s “regional roll-out” strategy.

Millchem’s new addition comes just days after the chemical distributor revealed a series of new contracts, which see it working with a number of blue chip companies in Malawi and Zambia.

“The announcement of the acquisition and of supply and distribution agreements show Cambria is making progress expanding into the region and the opportunities for earnings enhancing acquisitions,” Berry said in a note.

Berry reckons the 2014 and 2015 financial years will be “transitional” for Cambria, as the cost of the expansion into new market is expensed. 

He does, however, upgrade forecasts for 2016 with revenues expected to be £22.2mln (upgraded from £20.2mln) – which is double the figure for 2014.

“All expansion costs associated with rolling out into new markets will be expensed, so the Group is unlikely to be profitable, which is being compounded by the difficult economic environment in Zimbabwe. 

“However, a jump in revenues is likely as greater traction is achieved, whilst a possible sale of Leopard Rock Hotel and a possible Lonrho settlement regarding the aircraft claims could drive a cash in-flow.”

WH Ireland rates Cambria as a ‘speculative buy’ and has a 14p price target – which is almost three times the current 5.5p share price.

Another City broker, Beaufort Securities, repeated its ‘speculative buy’ rating, and said Cambria’s shares “could witness a strong upside”.

“The progress of Cambria’s subsidiary, Millchem, towards further commercialisation of its distribution capabilities is encouraging,” the broker said.

“The company had recently forayed into Zambia and Malawi. For Cambria, these contracts mark another concrete step towards expansion of its scale and geographies of operation.”

Company researcher GECR, meanwhile, repeated its ‘buy’ stance with a 14.63p price target.

“We see these announcements as testament to the cost and time benefits that Millchem provides and evidence that Cambria’s strategy of growing the scale, scope and regional presence of its investments is beginning to take shape."

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