Could I ask management to focus the company's strategy on profit growth (such as basic EPS growth) rather than organic turnover growth + acquisitions. Turnover growth should be relatively easy to achieve whereas profit growth is more difficult and more meaningful. With the increasing debt, I would also suggest that ROCE figures would be useful to shareholders in the financial reports. My impression is that the increased debt is not being satisfactorily reflected in increased profits but perhaps I need to be more patient.
A new video channel that allows investors to have their questions put to directors has been launched and Plastics Capital are the very first compan to be featured. Mellocast (http://www.mellocast.co.uk) is available now and made by investors for investors.
The first film is "Face to Face with Faisal Rahmahtallah of Plastics Capital" (AIM:PLA). David (aka Carmensfella) and Paul Scott, best known as Paulypilot on The Motley Fool boards, interview the Executive Chairman.
Nice bit of positive comment from the house broker today ..... courtesy of the UK Analysts' newsletter ...........
"Cenkos Securities retained its "buy" stance on Plastics Capital* (PLA) with a target price of 110p. Having generated an average of 4 million pounds of free cash flows over the last two year, the broker expects the plastics and rubber products manufacturer's net debt to fall to 11.2 million pounds by the half year, from 19.6 million pounds in March 2009. Cenkos noted that the firm has placed greater focus on geographic expansion, with 25% of revenues now coming from emerging markets. The broker added that on a prospective earnings multiple of 6.4 times for the year ending March 2012, the shares trade on a 30% discount to the peer group average. The shares were unchanged at 68p."
Debt reduction in advance of expectations - that's great & the cloud that has brooded over PLA for a couple of years seems to be now completely lifted.
Trading in line with market expectations - as the company's own broker is predicting 10.5p eps for the year to end March we can expect PLA to meet this. A forward P/E of less than 6.5 is far too low. PLA should be trading on a forward P/E of at least 9 with the debt problem now in the past.
FY2013 indication of significant growth is v encouraging - P/E of 9-10 on FY2013 eps of 12p+. That's my call - indicating a share price of at least 100-120p by this time next year. Loads of scope for beating this too.
"In earlier posts I've professed my love for businesses I can easily understand, and Plastics Capital certainly meets that objective. It filled me with joy to hear what the chairman, Faisal Rahmatallah, said they produced - 'widgets'. I've always wanted to own a widget manufacturer! For those not familiar in widgetary manufacturing, the firm basically produces very niche, highly specialised plastic components - like plastic bearings that can be customised for the end user, high-precision plastic rods used in the production of hydraulic tubes, and a consumable plastic product which helps packaging manufacturers crease their cardboard boxes. It doesn't get much more niche than this.
This was probably the first thing that attracted me to the business. They're among the market leaders in all their products, with (off the top of my head) 40% share+ positions in a few of them. This has both upsides and downsides. They're a tiny company, with a market cap of £25m, producing revenues of £33.5m last year. If this is the size of a leading manufacturer in 4 segments, how much growth can there possibly be? Well, instead of focusing on market share growth (though this is obviously a concern), the group is instead positioning itself to grab new business as it comes on stream in emerging markets. They recently opened sales offices in India and China.
Their figures are reasonable. Last year they earned £3.1m net profit, up from £1.9m in the year before. This is, however, muddied by the wide swings in the value of derivatives (mostly forms of currency hedges). Profit before the value of derivatives but including exceptional items sits at around £2.5m. My conservative variant, then, puts them on a P/E of 10. The balance sheet is also a factor which requires a light touch. It's reasonable, but does raise some concerns. Firstly, it should be noted that £18m of their total assets of £39m consists of goodwill. They also have £12.4m in current assets, comprising £3.2m of inventories, £7.4m of receivables, and £1.7m of cash. Current liabilities stand at £8.9m, so they have this covered, and they also have some leeway in their lending facilities. Still, it's far from rock solid. The £11.1m of LT debt sitting on their balance sheet since the formation of the group also hangs around their neck, though it is reducing year by year.
The chart at the top right has a few scarily large net losses in the crisis, but I'd choose to focus on the operating performance of the business over that period. It may seem like picking and choosing only facts which support my position, but the reality is that the only reasonable information we can take from that period is the performance of the operating business, which remains largely the same. The financing situation has changed completely, and it is this - and the associated exceptional costs - which resulted in the large headline losses. The debt fuelled period after the group's acquisition isn't reflective of the current situation.
Perhaps I'm being naive, but the balance sheet of such a company doesn't particularly worry me given the structure of the business. They've made consistent operating profit at decent margins, and the story of their manufacturing leads me to doubt there will be a reversal in that trend. They have a market leading position through an innovative use of technology and long-standing customer relationships, and as the company notes, their position is somewhat protected simply by the size of their markets. It would be prohibitively expensive for any of the large manufacturers to take a punt on these industries - plowing cash into a tiny segment would quite obviously be a poor strategic choice for a big manufacturer given the risk/reward.
And so I think they'll continue to fly under the radar, earning decent margins without
Very similar analysis to my "Back of the envelope" assessment from December last year, but I'd estimated debt to be £11m by the end of the year and was valuing on an 8 x multiple of EBITDA. Either way, it seems to me that debt will be down to c 2x EBITDA by year end and the trading update gives me more confidence of this. I would hope the market would react positively to this when it is confirmed in the YE results, but then who knows !?!
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