The niche plastics product manufacturer recently reported first-half numbers in line with expectations and said its full-year performance will be ahead of last year.
For the six months to the end of September, the AIM-listed company said it saw encouraging signs of its Industrials division rediscovering its mojo after the bearings business suffered delays in two important product launches by customers in the corresponding period of 2017.
The firm's first-half revenue rose by 11.4% to £40.63mln from £36.46mln, with organic growth clocking in at 12.1% on a constant currency (CC) basis. Its Films division’s organic constant currency (CC) revenue growth was 12.0%, while the Industrial division’s growth on the same basis was 12.2%.
Plastic Capital's underlying earnings (EBITDA) rose 42.8% to £3.67mln from £2.57mln, with EBITDA up 29.0% on a CC basis, thanks largely to the Industrial division, which is more operationally geared than the Films division.
Meanwhile, profit before tax rose by 75.4% to £2.10mln from £2.0mln the year before, and net debt widened to £15.75mln from £14.99mln.
Films division reorganisation still to feed through
The group’s Films division recently switched from being three separate businesses, each with their own sales forces and factories, to a unified division with just one sales force and one raw material procurement team.
The company estimates that it will take another 6-18 months for all the management and system changes to bed down fully.
On the Industrial side, the group’s new business pipeline - projects already won but not yet in production or not yet at full production rate - increased to £5.8mln, underpinning management’s confidence that the business is on “a healthy growth trajectory”.
The firm added that the second half of the fiscal year had “commenced favourably” with the usual seasonal upturn seen in the Films Division and a continued good performance in the Industrial Division.
The group also said it has seen an improvement in the order book in its mandrel (spindle) business, which was the only part of the group that had a weaker than expected first half.
Plastics Capital’s management said it is mindful of the potential pitfalls ahead, such as trade wars, Brexit and concern over plastic waste, but if factors remain benign, the board said it remains confident about the outcome for the current financial year and future growth of the group for the medium to longer term.
Faisal Rahmatallah, the firm’s chairman said: "I am pleased to report continued strong organic revenue growth across the group. This is now being reflected in improved profitability as the mix of revenues in our two divisions has rebalanced and because we are now feeling the full effect of sterling's devaluation in 2016 after the Brexit vote.”
“Meanwhile, we have continued to invest heavily in business development, new products, production capacity and employee capabilities,” he added.
Rahmatallah concluded: “Order books are healthy and we expect good sales growth to continue for the foreseeable future if economic conditions remain satisfactory.”
The company’s joint broker, Allenby Capital, described the results as “excellent”.
“Strong organic growth in the operationally geared bearings business, continued progress in the creasing matrix activities and another period of encouraging growth in films, led to revenue growth for the group of 12.1%. Investment in all business streams utilised the cash generated in the half year as well as additional borrowings, resulting in a modest increase in net debt from £15m to £15.7mln,” the broker’s analysts said.
“The group also benefited from the depreciation of sterling post the Brexit referendum leading, in part, to an increase in adjusted EBITDA of 42.8%.
“Trading in H2 has started well and we believe that the group is on track to meet our full-year earnings expectations and therefore we retain our fair value of 130p,” Allenby concluded.
Meanwhile, Ed Stacey analyst at research house Capital Network said he would be leaving his full-year forecasts for Plastics Capital unchanged after the interims but said the performance reinforced its confidence in those forecasts.
“The company lists various uncertainties that could affect the near-term or medium-term outlook – Brexit, trades wars, and the UK’s proposed plastics tax to be introduced in 2022. We believe that these are all well known to the market and do not represents new incremental risks,” Stacey said.
Plastics Capital shares rose around 2% after the reassuring interims but are still about 9% lower in the year to date at 105.60p.
Allenby's 130p fair value target indicates upside potential of almost a third, which would put the shares back near where they were in February 2017.