Stockwatch: A classic ‘recovery to growth’ play

Is FTSE SmallCap household and personal care products group McBride (MCB) genuinely moving into a growth phase? In 2015, it embarked on a new strategy under a new management team, to fully exploit market-leading positions and harness growth opportunities. They are mid-way in a transformation, with the objective to become “the leading European manufacturer and supplier of co-manufactured and private label products for the household and personal care market”.

Thus, with the stock currently 195p and a modest market value near £355 million, McBride has potential as a useful bolt-on for a larger consumer products group to grow by acquisition. How do latest results imply it is shaping up?

Good profits progress, revenue eases

Latest prelims to end-June are mixed: not surprisingly management emphasises “further margin progress in line with strategy” than revenue up a marginal 3.6% to £705 million due to euro strength versus sterling. Continental European revenues represent 72% of £556 million household products revenue; then there is £146 million personal care & aerosols revenue for £705 million total.

The EU is therefore very significant to McBride, hence mind the stock may periodically be affected by uncertainties about how Brexit trade negotiations will pan out. Total revenue down 5.9% at constant currency is, however, blamed on competition, a concern for growth-oriented investors.

Yet, efficiencies helped normalised pre-tax profit rise 17.7% to £34.6 million, a slight beat on consensus of £34.1 million. The normalised operating margin improved from 5.3% to 5.9% versus statutory up from 4.8% to 5.6%.

I’ve updated the table with 5.9%, although REFS’ calculations are historically low by comparison. Efficiencies achieved in the supply chain (£10.9 million) and overhead savings (£9.8 million) more than offset loss of margin from reduced revenues and raw material prices rising 2.2% (partly due to currency).

Normalised earnings per share (EPS) was therefore helped up 18% growth to 13.1p, slightly ahead of 13p consensus, for a price/earnings (PE) multiple of about 15 times, reducing below 13. The efficiencies also boosted return on capital employed from 23.4% to 27.7% and helped dividend growth near 20% to 4.3p.

Again, this was ahead of consensus and implies the 4.3p consensus for 2018 needs upgrading – with due regard also to earnings cover rising over 3.5 times. Mind, at this stage a yield approaching 3% is not exactly a prop.

But revenues should kick in with growth now prioritised

Progress with efficiency gains will peak in due course, at which point investors will want to see resumed revenue growth. In this respect capital expenditure is accelerating with “completion of a number of key projects”, although it would have helped if they’d been clarified in more detail (possibly the annual report in due course?).

Instead, the prelims review reiterates the 4 September acquisition of Danlind, a supplier of auto dish-wash tablets and laundry products based in Denmark which it hopes to develop through McBride’s extensive European reach. The consideration was £10.8 million, and also involved assuming Danlind’s £28 million net debt.

Management says the new financial year has started “satisfactorily” with financial performance anticipated weighted to the second half of the year; however, this does not appear a soft profit warning, rather that revenues from the “grow” strategy should start to kick in. Some faith is involved yet the plan is evolving well to date.

June refinancing quite improves the balance sheet

A refinancing in June involved repaying US debt, which will lower finance costs by some £2 million a year in context of £6.9 million finance costs versus £41.5 million operating profit on the latest income statement.

It did, however, involve an exceptional finance charge of £13 million (the bulk of £14 million exceptional charges), thus critics might say this effectively rolls interest payments back to one hefty charge. Net debt reduces from £90.9 million to £75.7 million, nearly two-thirds of which is longer-term, although pension liabilities are up 28% to £42.2 million due to higher inflation assumptions and a decrease in the discount rate.

I draw your attention to trade payables up 6.5% to £194 million versus trade receivables up 1.4% to £138 million. This increase/imbalance invites a question whether McBride is dragging on payments to enhance profitability. The ratio of current assets to current liabilities has reduced from 1.09 to 1.01, within which cash reserves are up 4.8% to £26 million. Goodwill/intangibles represent a modest 9% of net assets.

With net gearing at 31.4% this altogether is a sound balance sheet despite scope to poke at what’s going on. Cash from operations rose 20.6% to £63.3 million then was clipped by £13.2 million exceptionals, but its rising trend should help support investment and ongoing debt reduction.

Products should withstand a fall in discretionary spending

The portfolio comprises for example: Surcare laundry products (that are anti-irritating skin); Clean & Fresh general household cleaners; Limelite limescale remover; and Oven Pride, the UK’s leading oven cleaner with a unique bag system and powerful all-in-one solution.

Obviously, these are not items with strong “moats”, they are subject to competition both from rival brands and supermarkets discounting with their own; thus a sceptic might say, the industry context risks limiting the scope for investment to pay off.

But nor are they exposed to a fall in discretionary spending, such as on foreign travel or restaurants. In the macro context and considering McBride’s European reach, Brexit negotiations and the upshot for trade look more vital.

Board of directors owns modest equity

Being picky, the chief executive owns just 40,000 shares, likewise the chairman, while the finance director has 41,000 and three non-executive directors 54,000 between them.

Whatever option schemes may deliver, such equity ownership by the board doesn’t exactly weight their interests with outside investors, although in fairness their recovery-to-growth plan can’t be faulted for scope to enhance shareholder value.

Independent brokers are supportive

Besides Investec which has commercial links, Numis and Peel Hunt have published “buy” notes this year, Peel Hunt lately on 5 September.

I haven’t seen the detail, but I imagine such stances conclude this stock is a decent tuck-away for capital growth and long-term takeover potential.

The chief risk seems a dividend (as yet) less material to support the stock lest industry competition intensifies and/or Brexit becomes messy with the EU turning awkward. In this scenario, the stock could fall to exact a higher yield. But, as a company study in recovery-to-growth initiatives, McBride’s risk/reward profile favours upside.

McBride – financial summary                 Estimates year ended 30 Jun     2012 2013 2014 2015 2016 2017 2018                   Turnover (£ million)     814 761 744 704 681   IFRS3 pre-tax profit (£m)     12.1 9.0 -21.3 2.6 25.8   Normalised pre-tax profit (£m)     22.7 10.5 13.4 12.4 22.4 34.6 40.0 Operating margin (%)     3.1 1.7 2.3 2.3 3.9 5.9 IFRS3 earnings/share (p)     5.0 3.0 -10.5 -0.4 9.3 4.9 Normalised earnings/share (p)     10.5 3.7 8.4 5.1 7.3 13.1 15.2 Earnings per share growth (%)     14.9 -65.0 131 -39.8 44.1 18.0 16.0 Price/earnings multiple (x)               14.9 12.8 Historic annual average P/E (x)       25.4 19.4 18.3 27.1 20.8 Cash flow/share (p)     15.2 13.8 12.3 11.5 19.2   Capex/share (p)     12.3 8.7 10.0 11.9 7.0   Dividend per share (p)             3.6 4.3 4.3 Dividend yield (%)               2.3 2.3 Covered by earnings (x)               3.0 3.5 Net tangible assets per share (p)     41.8 39.5 22.9 20.4 26.6                       Source: Company REFS                  

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.