Interactive Investor

An AIM star flushed with success

11th July 2017 15:37

David Brenchley from interactive investor

All corners of the retail market face a difficult time as inflationary pressures weigh on the UK consumer. But not at AIM-listed Accrol, it seems. The maker of loo roll and tissues for both the mainstream and budget supermarkets grew profit by 57% last year and management were certainly bullish in a surprisingly punless conversation with Interactive Investor this week.

In its first full-year as a listed company - the 12 months to April - Accrol made £13 million selling toilet roll, kitchen towels and facial tissues to Aldi and Lidl, Home Bargains, B&M and Wilkinson. It also supplies Tesco and Morrisons. That's up from £8.3 million last time.

Accrol's share price is up almost 50% since it listed on the junior market just two weeks before last June's Brexit vote. It's been as high as 166p.

And it's the European discounters that are helping drive product sales, which has been a lesson in foresight by Jawid Hussain, the businessman who founded the company in 1993 and made the decision to aim at the bargain-basement retail outlets in 2008.

The company continues to make money from retail disruptors' growing popularity, increasing group revenue by 14% to £135 million. With Aldi and Lidl still in the midst of significant store investment programmes, the tide is with the Accrols of this world.

 

While the discount sector in general is looking at 10% annualised growth in market share, Aldi and Lidl are the main drivers of that, Accrol's chief executive Steve Crossley tells Interactive Investor. And they're not just wining on price, it's quality as well.

"We've done some recent independent consumer testing and a Lidl product we manufacture came out on top of all leading brands including Andrex, so you can get great quality as well as great value in the discount sector," he explained.

"The UK shopper is not daft. They've become more and more savvy and looks very carefully at price and quality balance, and we believe that they will look even more towards the discount sector."

But there are problems. Tissue manufacturers tend to purchase all their raw materials in US dollars, so "there is definitely a need to see movement in retail prices".

Negotiations on that front are ongoing, we're told. Gross margins declined slightly (by 0.2%), but are still a healthy 27.9%. Crossley says the finance team, headed by James Flude, a former big-hitter at Leeds-based hair product manufacturer Good Hair Day (GHD), did a great job protecting the numbers for 2017 by hedging against a potential Brexit vote.

Listing on AIM just a fortnight earlier was certainly bold. The fact that 70% of Accrol's cost of sales is in dollars "was obviously a key area of questioning by the fund managers" they pitched to, says Flude. "But by the actions we took, particularly around hedging, we were able to get them comfortable."

But fund managers at Miton, Schroders and AXA were happy to invest and the placing was over-subscribed, adds Crossley, who has worked for all sorts of food manufacturers including Goodfella's pizza maker Northern Foods, and joined the company at IPO.

At the time, the board promised a dividend yield of 6% to the placing price of 100p. And, true to its word, the full-year dividend is 6p per ordinary share. Even at the current market price, that's a yield of 4% - pretty generous for a young AIM company.

Joint house broker Liberum pencils in dividend growth for 2018 of 25%, bumping up the forward yield to 5% at today's price. With forecast earnings per share (EPS) of 12.5p, the payout is well covered, too (1.6 times).

The analyst view and where next?

Having been appointed as joint house broker only on Monday, Liberum's initiation note was unsurprisingly upbeat. "Accrol offers an exciting way to capture growth from the discounter segment," trumpets analyst Wayne Brown.

A forecast price/earnings (PE) ratio for 2018 of 12.4 times means the stock trades at a 20% discount to larger peers such as Kimberly Clark and McBride, so it represents good value, he adds. It offers a three-year EPS

Compound annual growth rate (CAGR) of 9%, too, and even this may be conservative.

"Return on capital employed is set to rise three percentage points as efficiency rates improve… additionally, investors are rewarded with an average total shareholder return of 14% per annum for the next three years." A price target of 200p implies upside of 36%.

Turnover of £250 million is the company's ultimate goal right now, driven both organically but also potentially through "compatible M&A activity", and Accrol is investing big in warehouse capacity and its supply chain.

It's already grown turnover from £20 million nine years ago to £87 million when Flude joined the business. At £135 million currently, it momentum is with the company.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.