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AIM listed Plastics Capital (LSE:PLA) cannot be described as a sexy stock. But it is a true value investment. I first tipped it at 40.5p in November 2010 (and was kicking myself for not tipping it earlier). Today the shares are at 66p valuing the company at £18.2 million. I would have thought that a fair 12 month target price is around 103p. Let me explain…
The company makes high margin high volume customised plastic products for niche growth markets and each is a leader in its field. Essentially it makes plastic versions of things you might assume would be made of metal: hose mandrels, bearings etc. I told you this was not sexy. The key point is that it has very strong positions in niche markets and according to one broker “Each of Plastics Capital’s four operating companies is a leading player in its niche and each is capable of delivering growth of up to 20% per annum over the next five years.” I am not sure about 20% but these are good solid businesses run at a group level by a very clever and charming fellow called Faisal Rahmatallah who I have known for a good while. We had a useful chat earlier today and my confidence in this story has increased as a result.
The problem that Plastics has suffered from an investor perception is that it had far too much debt. With low capital requirements it was always capable of paying it down but it still freaked a few folks out. Net borrowings (the result of acquisition) were £16.7 million at March 31st 2010. But a year later they were £12.3 million, they were £10.1 million by March 2012 and by the end of this year they will be £7.9 million. Even allowing for the payment of a modest dividend they would – ceteris paribus – fall to £5.3 million by 2014 and to just £2.4 million by 2015. Interest cover is thus incredibly comfortable. But the reduction in borrowings clearly cuts financing costs which contributes to earnings growth. Other folk would slow down debt reduction and buy back the lowly rated shares but Faisal is a cautious fellow. I like that.
A trading statement issued on 10th September was reasonably upbeat although no-one can pretend that life is easy: It reads:
Plastics Capital plc the niche plastics products group, announces an update on trading for the financial year to date and is pleased to confirm that the Company continues to trade broadly in line with market expectations. Since the beginning of the financial year eight new key accounts have been added. This, together with new projects secured from existing customers, has the potential to deliver more than £2 million of additional annual turnover over the coming two to three years. Notable key account successes include new hydraulic hose manufacturers in Mexico and the United States of America within the mandrel business and a new distributor for creasing matrix in Indonesia.
For the year to date, the total contribution from new business has offset lower sales to existing customers, particularly in the Industrial division, which mainly serves the capital goods markets. Looking forward, whilst there is little evidence to suggest demand from existing customers will alter in the near term, the Company believes that further new business already in the pipeline will contribute meaningfully during the second half of the current financial year.
On the back of that, I would expect that sales on the current year (to March 31st 2013) will be £33.1 million, up from £32.1 million, with £34.6 million on the cards for next year. Profits growth will be driven in large part this year by falling interest charges and hence I am looking for pre-tax profits of £4.1 million this time (up from £3.8 million) with £4.5 million in 2014. Earnings should increase from 10.1p last year to 11.3p this time to 12.4p next time.
So what is this worth? This company is well run, has an ever stronger balance sheet and is perfectly capable of delivering earnings growth of c10% per annum on a consistent basis – for what it is worth, analyst Geoff Allum forecasts earnings of 13.6p for 2015. I would say that a PEG of 1 minus net debt is hardly undemanding and that implies a one year target of 103p. The company’s products may be a trifle unglamorous but that is good. I like solid and dull. 56% capital upside (plus a couple of pence in dividends along the way): that is sexy.
