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Plastics Capital PLC - Organic growth Accelerates

Written by Ed Stacey

FY MARCH 2018 RESULTS

Plastics Capital PLC (LON:PLA) has reported a strong set of results for the financial year ended March 2018. Revenues of £76.7mln and earnings per share (EPS) of 9.5p are both slightly ahead of our forecast, which was last updated at the time of the detailed Plastics Capital trading update on May 2.

The most important headline metric, in our view, is the organic (like-for-like) revenue growth of 13.0%, which reflects a strategy shift undertaken last year to focus more on top-line growth.

KEY FEATURES OF THE OPERATING PERFORMANCE

The Films division delivered 23.2% organic revenue growth, reflecting new customer wins, and capacity expansion.

The plastic ball bearings business, within the Industrials division, experienced a 4% like-for-like decline in revenues as expected, reflecting delays that were announced in the first half relating to the slow ramp-up of production on some major new projects. The company reports that there was some improvement in the bearings business in the final quarter. We present an overview of the business segments on page 2.

MARGIN PROGRESSION

Underlying EBITDA margin declined to 9.2%, from 10.5% the previous year, in line with the guidance of the May 2 update. This is primarily a result of the business mix – more of the growth came from the lower-margin Films business rather than the Industrials division.

We believe that the Industrials division is now positioned to make positive incremental contributions from FY Mar2019 onwards, leading to group profit margins moving upwards again. Our margin forecasts are presented on page 2.

CONCLUSIONS

During the last two years, Plastics Capital has undertaken a significant programme of investments - £4.1mln in FY Mar2018, including £1.8mln of investment in new capacity. The benefits are evident in the FY Mar2018 revenue growth, and we believe that earnings will begin to follow from FY Mar2019 onwards. We believe that the current valuation at a Mar2019 price/earnings ratio of 9.3x represents an interesting entry point in light of these growth dynamics.

The chart above left shows Plastics Capital’s revenues by business segment:

  • High strength packaging (Films division) – High strength plastic films for industrial packaging applications.
  • Speciality sacks and pouches (Films division) – Packaging for the food industry and other applications.
  • Creasing matrix (Industrial division) – A disposable plastic insert used in the manufacture of cardboard packaging.
  • Plastic ball bearings (Industrials division) – Ball-bearing assemblies for applications such as steering columns, dashboard controls, and household appliances.
  • Hose mandrels (Industrials division) – A specialised plastic rod used in the manufacture of hydraulic and industrial hoses.

The chart above right shows the profit margin progression in 2018 and in our forecasts. The reduction in the EBITDA margin for FY Mar2018 is primarily due to the business mix, with more of the organic growth coming from the Films division, which is a lower margin business. The growth mix is illustrated in the following chart:

We believe that the 13.0% organic revenue growth in FY Mar2018 shows that the company’s investment programme is succeeding. Going forward we expect this growth to be reflected at the earnings level, as growth becomes more balanced across the business segments, leading to a better mix, and as the positive volume effect benefits margins across all businesses.

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