Macfarlane Share Discussion Threads

[effortless cool] 03/5/2021 17:15

Header updated with my latest forecasts. Not hugely changed, in practice.

[effortless cool] 23/4/2021 16:44

Cheers illiswilgig, pireric. I feel I'm on good company on this board and I'm very confident on the prospects for MACF.

[illiswilgig] 23/4/2021 15:28

Yes much more likely that the excellent standard of analysis on this bb is responsible :-)

cheers

[effortless cool] 23/4/2021 13:03

Well, IC tips evidently aren't what they used to be (unless they have the Simon Thompson brand attached).

[pireric] 23/4/2021 09:20

Agree. Historic underlying EPS CAGR here has been over 12% on my calcs, and with modest forward organic growth and margin assumptions, plus the M&A theyve done, Im expecting baseline ~9.5% and 7.5% eps growth this year and next. Id imagine the end result is double digit eps growth in both years. At yesterday's close I have this on slightly over 10x underlying fy22 earnings.

Given the track record at MACF, no reason in my view this shouldn't be on 1.5x PEG today. So fair value today in my view is close to 150p. And frankly, given the bull market we've been in for a while, when I look at the earnings multiples some stocks are getting... You couldn't rule out a 16-18x P/E multiple making sense on a longer term view.

Eric

[illiswilgig] 23/4/2021 09:12

Hello EC,

Thanks for that, good to know that its getting tipped.

For what its worth my valuation of 145p seems to agree closely with yours when using the same earnings multiple of 13.5. My valuation includes the pension reduction and recent acquisition and some assumptions for organic growth - but its probably less sophisticated than yours.

I do think that an PE above 13.5 - I've pencilled in 15-17 - is a possible upside as acquisitions and organic growth raise margins and the company becomes tipped more widely?

cheers

[effortless cool] 22/4/2021 17:23

Tipped tonight in the IC

[tole] 01/4/2021 21:21

End of tax year selling maybe. I added more under a pound fwiw.

[effortless cool] 01/4/2021 17:25

Ridiculous price action today, leaving this even more materially undervalued, in my opinion. There is little doubt that this latest acquisition will add value.

[kacker1] 01/4/2021 17:07

Doesn't look like the market liked that very much...... shame to see such a negative week and loss of some of gains recently but still looking like good value to me.

[chrisdgb] 01/4/2021 09:07

Another classic looking MACF acquisition this morning..........

[greggphilips88] 09/3/2021 18:19

A lengthy write up on MACF by Algy Hall in Investor's Chronicle dated 08 March 2021 in relation to the Cornerstone Growth screen. Of the 9 shares covered, only MACF passed all the tests, so Algy concentrated on it in his write up.
Overall, I took it as a positive assessment of MACF acknowledging the business may be better than he assessed 12 months ago, with less cyclical risk and more resilience and upside potential. He highlights some risks and opportunities, but summarises that the 12-mth forward looking PE of 12 should "prove a bargain if the progress continues".

[cellars] 05/3/2021 14:15

Thanks EC. fwiw my forecasts are (yet again) similar.

[pireric] 04/3/2021 21:24

Nice summary EC. I haven't cracked my own adjusted EPS numbers in fully fledged form yet. They're making good headway on strategic initiatives it would seem, and I suspect there will come a point in time where the market cap starts to draw further interest from institutions (which I suspect would be supportive of the stock re-rating to what I would call a fairer multiple). Given the low rating, it does feel like the stars are aligned for this to go on a good run this year.

Thanks for sharing.

Eric

[effortless cool] 04/3/2021 21:15

Header updated with latest projections and copied below.

MACF released their FY 2020 results on 25 February and then announced the acquisition of GWP Group on 1 March. These projections reflect both of those announcements.

The results were, in my view, superb, beating my forecasts and also beating broker forecasts by a greater margin.

After dropping against the prior period in H1, second half revenues proved resilient in the face of COVID, being 6% higher than 2019 H2. Gross margin in packaging improved from 31.1% to 32.5% and in manufacturing from 32.2% to 32.7%. The adjusted admin expense ratio, by contrast, increased from 22.2% to 23.4%. However, this was hit in 2020 by three (hopefully) one-off factors: COVID safety preparations, provisions for bad debt provisions and end of lease provisions.

MACF is a cash-generating machine, and FY profits of £13.0m translated to a remarkable £23.3m of net cash from operating activities. This facilitated the repayment of £10.2m of debt, shrinking the net debt position down to just £0.5m. Further, unlike many companies with pension deficits, MACF's clever use of liability-driven investment funds meant their deficit actually shrunk materially in 2020 to just £1.5m. The icing on the cake here is that they have agreed with the trustees that deficit repayments will now reduce from £3.1m per annum to £1.3m, which will improve future cash flows for shareholders materially.

The acquisition is also very good news. Unusually, it is of a manufacturing business, rather than a packaging distribution one. What makes it particularly interesting is its scale - £13.2m revenue in the year to September 2020 - and its excellent performance - 43.8% gross margin and 13.1% operating margin - both far better than MACF's current manufacturing businesses. The efficiencies from potential horizontal and vertical integration, plus the additional scale, should bring significant operational gearing benefits.

My revised forecasts are (no broker forecasts available to me yet):
# Revenue: .............. 2021 £253.8m (£xxx.xm), 2022 £263.0m (£xxx.xm)
# Reported net profit: .. 2021 £14.0m (£xx.xm) .. 2022 £16.4m (£xx.xm)
# Adjusted net profit: .. 2021 £16.3m (£xx.xm) .. 2022 £18.4m (£xx.xm)
# Reported EPS: ......... 2021 8.89p ............ 2022 10.39p
# Adjusted EPS: ......... 2021 10.35p (xx.xxp) .. 2022 11.66p (xx.xxp)
# DPS: .................. 2021 2.75p (x.xxp) .... 2022 2.95p (x.xxp)
# Net cash/(debt): ...... 2021 -£5.2m (£-x.xm) .. 2022 £1.1m (£x.xm)
# Pension surplus: ...... 2021 £14.7m (£x.xm) ... 2022 £23.2m (£x.xm)
(Adjusted figures add back amortised intangibles)

My target adjusted PE ratio increases to 13.5x (85% of the market median) and my valuation increases to 147.7p (was 112.3p), which includes adjustment for the pension deficit, net debt and outstanding options.

Even after the recent rise, this target price represents a 43% premium to the latest closing price of 103.0p. On that basis, MACF becomes a STRONG BUY for me. This may seem aggressive, but the model is consistent with previous iterations and it does seem to me that finally the stars are aligned for MACF to deliver big time.

I have put my money where my mouth is and increased my holding to 400,000 shares at an average of 67.06p. Dividends to date: £23.2k.

[mauricemonkey] 04/3/2021 16:57

Personally (and I self acknowledge idiocy), I think there's a change in market sentiment - my underperforming value shares, inc this one, were all up decent amounts today. I suspect the rotation to value from QM is taking place as earning start to become fashionable again over story stocks.

[chrisdgb] 04/3/2021 13:12

Still seems decent momentum here, nice to see through the 100p level..........

[effortless cool] 01/3/2021 13:57

Having updated my valuation model, I believe these to be hugely undervalued. That will be even more the case once I add in this morning's acquisition.

Accordingly, I have just added another 20k shares to take my holding up to 400k.

I'll try and update the header this week with figures including the acquisition.

There seems to be a strange lack of broker forecasts. Arden, I think, have ceased coverage and I can't get access to n+1 Singer research. Does anyone know if they have published an update?

[chrisdgb] 01/3/2021 08:15

Nice to see, just the sort of thing they are good at, push on to 120p in the medium term..

[pireric] 01/3/2021 07:44

Quality looking acquisition. GWP for £15.1m plus £2.7m net asset adjustment given their strong balance sheet (but they recoup £1.6m of that in net cash).

Looks principally into the manufacturing side of the business but they distribute from their manufacturing facilities. Makes a double digit pre tax profit margin.

Importantly, looks like GWP have part ownership of a corrugate supply company which is strategically important given raw material tightness in the market

Deal appears 6% accretive to revenues, and 9% accretive to underlying pre tax profit.

Presumably means underlying EPS could already be on track to reach towards 9.5p this year... As such Macfarlane is potentially now on less than 10x forward fully adjusted earnings

Eric

[pireric] 28/2/2021 12:56

Tried to recalculate what adjusted earnings are again excluding both the acquired intangible amortisation and also non underlying items (e.g. provisions).

On a 20% tax charge, I calculate that diluted underlying earnings in 2019 was 7.55p and was 8.81p in 2020. Which is an impressive more than 35% higher than what Macfarlane reported at 6.42p. Pretty close to what Effortless Cool has set out in the header here.

It also means Macfarlane on an adjusted basis is on only 10.4x 2020 earnings. Can let others decide whether they think that is the right multiple or not (!).

Eric

[tole] 26/2/2021 09:56

Have a small holding here for recovery.
Highlighted commentary inthetimes today..

hxxps://www.thetimes.co.uk/article/macfarlane-wraps-up-tidy-sales-and-profit-increases-8cblkfc06

BUSINESS
Macfarlane wraps up tidy sales and profit increases
Greig Cameron, Scottish Business Editor
Friday February 26 2021, 12.01am, The Times
Peter Atkinson, chief executive of Macfarlane, said a number of retailers had “pivoted”; to begin offering more goods online and quickly needed to buy packaging for those
Peter Atkinson, chief executive of Macfarlane, said a number of retailers had “pivoted”; to begin offering more goods online and quickly needed to buy packaging for those

A rise in online shopping has helped to boost profits at Macfarlane Group.

The packaging specialist said yesterday retail companies now made up about 28 per cent of its sales, compared with 23 per cent previously, as it published annual results.

Turnover rose by 2.1 per cent to £230 million last year, with pre-tax profit increasing by almost 10 per cent to £13 million.

The Glasgow-based company, which can trace its roots to 1949, offers bespoke packaging designs from depots around Britain, employing nearly 1,000 people. It also has facilities in the Netherlands, Ireland and Sweden and manufactures packaging and labels.

Macfarlane is paying a 2.55p dividend for 2020, compared with one of 0.69p in the previous year.

Peter Atkinson, chief executive, said that trading momentum had been maintained in the early weeks of 2020. While some customers in the automotive and aerospace sectors have struggled during the pandemic, Macfarlane reported growth in areas such as hygiene, medical and food, alongside retail.

Atkinson, 64, said that several bricks-and-mortar retailers had “pivoted”; in the early days of the pandemic to begin offering more goods online and had quickly needed to buy packaging for those. New customers included Halfords and Mountain Warehouse.

Strong cashflow has helped the company to reduce its net bank debt from £12.7 million at the close of 2019 to less than £500,000 by the end of December.

Atkinson confirmed that Macfarlane had a pipeline of acquisition targets and hoped to be in a position to “get a few over the line” quite shortly. He indicated that it was in different stages of talks on deals that could lift its turnover by up to £40 million if they all came about, while acknowledging that some of those transactions could be three years away from being completed.
Sponsored

Atkinson warned that the pandemic had not made it any easier to do deals and said: “We wouldn’t buy distressed businesses, we only want good-quality ones.”

Macfarlane’s shares rose 7½p, or 8.7 per cent, to 92¾p.

[greggphilips88] 25/2/2021 17:32

Positive write up today on MACF results by Paul Scott in Stockopedia's Small Cap Value Report. In summary: "Overall, this share gets a thumbs up from me. It looks a decent, resilient business, and is attractively priced".

[pireric] 25/2/2021 17:30

I've bought in today. Valuation looks anomalously low for the quality of management and track record here. Adjust for the amortisation of acquired intangibles and I make it to be trading on 12x trailing earnings. Don't see why it couldn't trade at 15x as a starting target. With pension cash commitments now lower, plenty of money in the bank for M&A to resume, and a decent trailing dividend yield. Think this can re-rate nicely throughout this year. Expect it to take out the multi-year high at some point.

Doubt too many investors understand that these results are fully stated and need to be adjusted to remove the non cash amortisation charge. Which in itself adds a material amount to the stated operating profit.

Eric

PS: Effortless do you happen to have the email contact for anyone senior at Macfarlane? With Ivor the new CFO, no reason they shouldn't be providing an adjusted EBIT/EPS figure that exes out the amortisation charge. if you do and are happy to share, could you direct message me?