Macfarlane Share Discussion Threads

[pireric] 27/10/2021 09:41

After a month and a half of consolidation, I have been upping my position here again (adding back a little of the trim in the high 130s).

I am expecting a trading update in 3-4 weeks time to show that trading continues to be good. I remain of the opinion that there is further upside to the broker estimates for this year and the eventual valuation will prove to be comfortably under 12 times adjusted PE. We may need to wait until FY to get the upgrade but it could come in Q3. In the context of the quality of the track record and management, I still struggle to find better risk-adjusted value in any pockets of the market.

There has been one murmuring (investors chronicle) in the last month asking about whether the e-commerce boom is a one off spike for packaging players. Its not hard to disprove that as being unlikely. E.g. if we take the US retail ecommerce market, which has had offline retail unlocked for far longer than the UK, the growth rate has calmed down. But the overall spend trend reached new quarterly ATHs in Q2. Ecomm spend was about 155bn USD in Q1 2020, spiked to 204bn in Q2 2020, and rose to 215bn in Q1 2021 and 222bn in Q2 2021. Some are but I would not want to deny that e-commerce growth is a long term demand trend and yet today ecomm retail is only 13.3% of total US retail sales so a long runway there.

Eric

[effortless cool] 02/9/2021 20:35

Header further updated to include revised broker forecasts. Their revenue forecasts are reasonable but their profit forecasts are, frankly, stupid.

[effortless cool] 30/8/2021 22:13

Header updated. New target price 220.4p.

Let's party!

[illiswilgig] 29/8/2021 18:12

Hi Eric,

Thank you. You are quite right, my mistake.

I was referring to the Operating Profit before amortisation and impairment, which I termed Adj Op Prof -and calculated an adjusted operating 'eps' directly from that. Had a brainfade and mislabelled it. Wish I hadn't bothered! Sorry for any confusion caused.

My figures of


profit 15.2m
eps 9.7p

are not affected by my confusion in terminology.

The accompanying adjusted profit and eps (adding back my estimated amortisation and impairment charges) are

adjusted profit`19.5m
adjusted eps 12.3p

cheers

[effortless cool] 29/8/2021 18:02

illiswilgig,

Thanks for posting your initial thoughts. Regarding seasonality, there is a strong and consistent H2 bias for both Packaging and Manufacturing. On a like-for-like basis, you might conservatively expect H2 to be £10m higher than H1. Additionally, H2 will benefit from a full contribution from the two acquisitions made during H1; another £4m, say. So, on the back of an envelope basis, FY revenue = 2 x H1 revenue + 10 + 4 = £281m.

I agree with you that, after years of steady performance, MACF now seems to have moved to another level. I'm also reworking my valuation model, but I will not be surprised if the new figure starts with a 2. I still believe that there is loads to come here.

[pireric] 29/8/2021 17:00

Hi Illiswigig,

Just on first pass of reading, I think the adjusted EPS to calc from H1 is (without having access to my notes), somewhere around the 5.25p level. So the first simple doubling calc for adjusted EPS being more like 10.5p

Eric

[illiswilgig] 29/8/2021 16:49

What better way to spend a Sunday afternoon than reviewing my figures for MACF over the rest of the year. Looking over my expectations for FY21 based upon the outstanding H1 results last week my first thought is: where to start?

Normally I base my expectation upon the previous year. But it seems to me that Macfarlane has moved up a gear with these results? And maybe I need to take a more basic look at the potential.

Adjusted operating profit for H1 was 11.083m on turnover of 133.513m. I like to have a back of the envelope calculation before I delve too deeply into a spreadsheet. The simplest possible approach I can think of is to double H1 for the FY which gives:

Revenue - 267m
Adj Op Profit - 22.2m
Adj eps - 14p
(157.912m shares in issue excluding options)

In my view this sets a baseline for FY21? It seems overly cautious to assume that MACF will do worse in H2 than H1? But maybe I am missing something here - if so - please let me know!

Looking at the three most recent years, there is some seasonality to the results, with H2 revenue being above H1, by 13% in FY18, 9% in FY19 and 18% in FY20 – though to some extent FY20 is affected by recovery from the initial lockdown in Q2?

H2 revenue 10% above H1 seems a reasonable approach? Especially given that H2 will have a full contribution from the two new acquisitions. Gross margin is usually higher in H2 as well. But given the outlook for prices, supply constraints and logistics I’m not going to assume an improvement. Which results in my revised expectations being

FY21
Revenue - 285m
Adj Op Prof - 25.5m
Adj eps - 16.1p
(shares in issue 157.912m excluding options)

For the statutory earnings after tax I have used similar amortisation, finance costs and tax rate to H1 and that gives
Profit - 15.2m
eps - 9.7p

Its worth noting that the decision to impair 0.987m of goodwill on manufacturing has held back the H1 basic eps somewhat – it would have been 4.5p instead of 3.8p without the impairment. I’m sure they reviewed the impairment correctly. But a good decision in my view. There is a little more in the tank than meets the eye? The more I study this company management the better I like it?

Looking back through my notes I find, somewhat to my surprise, that 9.7p is the same figure I came up with on 19 march 21 when I revised my expectations based upon the two acquisitions and on 10% growth (with no bad Q2 in this H1). Was I being too optimistic in March – or am I being too cautious now? Either way I am going to let it stand now.

Caution is certainly justified? And I imagine that in any discussions with brokers or analysts the company is being more cautious than my estimates.

Far better to under-promise and over-deliver than the reverse in my view, no matter how good your excuses? Probably means that upgraded broker figures are still likely to trail the likely outcome though, particularly as the analysts appear to want to add further caution to management’s caution?

cheers

[pireric] 26/8/2021 20:35

One final one from me - investors chronicle write-up this evening. Suggest more M&A in the pipeline, including into continental Europe to build out the follow the customer strategy. If they can have any semblance of success in replicating what they're doing in the UK in mainland Europe, then that would dramatically expand the addressable market



Eric

[spann_703] 26/8/2021 20:34

Enjoying a few Chimay Blue this evening, with today's proceedings can certainly afford the odd bottle. Excellent HY report.

Thanks to all who took the time to post in-depth analysis on this thread. If only more ADVFN threads were like this one.

MACF seems to exhibit a rare confluence of being moderately-priced, well-run, and growing revenues and profits. I'm struggling to find other similar opportunities currently.

[pireric] 26/8/2021 19:14

A positive day. Shore Capital bump their adjusted EPS forecast for the year to 10.2p, but openly admit that they have put caution into their forecasts and room for upgrades. And I'd agree, and would feel confident that by the end of the year their forecasts will start with an 11p figure, not a 10p one.

If I use my forecast of 11.4p in adjusted EPS, then 135p is a 2021 P/E ratio of only 11.8x.

Eric

[illiswilgig] 26/8/2021 07:50

Ha!

Well done Marcfarlane. My recent wobble in expectations proves to have been unnecessary.

Results exceed my earlier expectations primarily because of the growth in sales - including at the two new acquisitions where I seem to have woefully underestimated the contribution in H1 being overly cautious.

Gross margin looks to be spot on where I expected it, either by luck or by judgement, and at first glance I think they have been trying to be cautious where they can be in the accounting.Haven't been through the details yet, cup of coffee first.

Looks like it should retain its position as my largest holding today,

cheers all

[pireric] 26/8/2021 07:46

Rough updated forecasts from me with a tinge of conservatism as I dont have a big H2 swing on EBIT
- £278m full year revenues
- £23.8m adjusted EBIT
- 11.4p adjusted EPS
Puts the stock on 10.5x P/E

Eric

[pireric] 26/8/2021 07:24

Super results, in my view.
- revenues £133.5m 15% above my implied broker estimate of £116.6m and even above the around £125m I was expecting
- gross profit 23% above my implied broker expectation
- MACF has started to give an adjusted EBIT number, which was 72% above my implied first half broker estimate.

Other details
- gross margins very resilient, with distribution GMs 32.7%
- net bank debt £8.7m, pension scheme turned into a £4.5m surplus
- demand from aero, auto and hospitality not yet recovered in the overall sales mix
- new customer business wins 9% above H1 2019 levels in the half
- I estimate adjusted EPS to be about 5.2p for the first half alone on a 19% tax charge
- some cost pressures and risks to come in H2. My gut feeling is that this is conservative speech. But even if true, I cant see how brokers dont at least move up to £270m on revenue which is a 9% upgrade, and a bigger upgrade needed on profit

So not only impressive results, but also giving adjusted EBIT which should start to help close the valuation gap this trades on.

Eric

[effortless cool] 26/8/2021 07:19

Wow! Spectacular H1 results this morning that blow my forecasts out of the water. And my forecasts were already well ahead of the broker forecasts. Expect significant upgrades.

[illiswilgig] 22/8/2021 13:05

Eric,

Yes I agree with you.

I may prove to have been too pessimistic. I certainly hope so. But having been mulling it over I thought it worth putting down my thoughts and how I see that may affect results, otherwise I can find it hard to assess whether my expectations have been met or not.

cheers

[pireric] 22/8/2021 10:36

No problem. My expectations are a bit ahead of that implied broker estimates I've put down, but then we here are owners of the stock so comparing to market expectations versus our own probably makes some sense to think about how the stock reacts on the day.

Raw materials/supply - yes it's a factor, and I imagine H2 gross margins will and are likely to be better than H1. However as I discussed in post 363, there should be a world of difference between manufacturers and distributors, as distributors should be largely able to pass on cost increases, albeit maybe with a 3-6 month lag. Hence Headlam's profitability and also James Latham are not being that adversely impacted by it. There are differing dynamics between flooring vs timber vs packaging but even so. Ecommerce should be much higher y/y which supports distribution GMs, and an investor I spoke to on MACF recently also said that a quarter of customers are 'index linked' so dollar GM stays the same.

We'll have to wait and see but I don't think tight packaging supply chains will hugely dent the outcome for the year. We already know from the early trading update that profit was "well ahead" on last year.

I stopped down to EBIT given hard to forecast the tax charge half year to half year

Eric

[illiswilgig] 22/8/2021 09:41

Thank you Eric, very useful.

I've been hearing a lot of noise around raw material prices and supply shortages in the last few weeks. A number of companies have recently warned of problems caused by this, Robinson last week and previous Headlam and James Halstead amongst others that I happen to remember.

Macfarlane's AGM Outlook statement in May addressed this:

'Covid-19, supply shortages and raw material price increases will continue to have an impact on the markets we serve for the remainder of 2021. However, we have consistently demonstrated our ability to address such challenges and effectively support our customers. We are therefore confident that the resilience of our business model, together with the skill and commitment of our people, will ensure 2021 will be another year of good progress for Macfarlane Group.'

Gives me some confidence that management have been expecting this - nevertheless I anticipate some impact from it. I've reviewed my figures for H1. Probably a bit optimistic. I tend to be so. If I dial back my assumption for gross margin to 33% (was 34%) the same level as the previous H1 it changes my expectations (I hesitate to call it a forecast) to

Revenue £120m
Operating profit £5.3m (was £6.4m)
eps 2.3p (was 2.9p)

Probably more realistic? We shall see.

cheers

[pireric] 21/8/2021 13:47

Implied broker expectations ahead of Thursday's results

I've had a go at calculating what Shore Capital's effective expectations are for the first half of this year, using some realistic assumptions based on their full year forecasts. Hopefully this will gives a base set of numbers such that we can look through the results on Thursday and know where they are likely to be against actual broker expectations and whether their full year 2021 forecasts will be going up or down.

These are rough estimates, but should be semi-accurate I'd think for H1. May be worth putting a little bit of margin either side of the operating profit metrics given more likely to be inaccurate there

Revenues: £116.6 million
Gross profit: £37.0 million
Stated operating profit: £4.97 million
Stated operating profit add back amortisation charge: £6.45m

Let's see what Thursday brings.

Eric

[pireric] 01/8/2021 20:46

My (what feels slightly conservative) revenue forecast for H1 is £119.7m. I find it tricky to estimate all the various acquired amortisation charges, to come up with a reported profit charge, but I'll try to figure out a reasonable adjusted profit guess off that sales figure if I have time in the week

Eric

[johnrxx99] 01/8/2021 04:33

By contrast, consensus is :-

Pretax profit - 17.5m
Norm EPS - 8.90p
T/O - 248m
Divi - 2.7p

GLA

[illiswilgig] 31/7/2021 13:39

With H1 over and results expected in a few weeks - I took a quick look at my expectations.

To my embarrassment I found an error. My calculations managed to double count the contribution to operating profit from the two new acquisitions - the difference primarily in H2 - and helps to explain my very bullish previous figures. Oooops.

My revised expecations for FY21 are now

Revenue 265m
profit (reported) 14.5m
eps (reported) 9.2p

which seems perhaps a little conservative now? Will likely be hard to tell from the interims as the figures are normally H2 weighted. For what its worth my expectations for H1 are

Revenue £120m
Profit(reported) 4.6m
eps (reported) 2.9p

Very sorry for the error.

cheers all,

[pireric] 20/7/2021 20:11

Small snippet. Sounds like GWP continues to grow well



David Mason, Sales Director at GWP Packaging, said: “One of the key areas of focus for us here at GWP is the award winning, technical design service that we offer. With virtually all of the packaging we manufacture being produced bespoke to the exact requirements of our customers, having a well invested, knowledgeable design team is absolutely crucial.”

He added: “We have seen exceptional growth over the last 18 months, and the success of our design service has been integral to this. As Clirenda has the perfect skill set and experience within the packaging industry, we believe she will be a key asset to both the design team and wider business moving forward.”

[pireric] 14/7/2021 21:39

The stock has lost a bit of momentum and is now practically flat on the prior 3 months, which is only slightly worse than e.g. the FTSE250. Feels like there has been a seller around over the past few weeks, albeit there's lowish liquidity in general. Still remains distinctly undervalued in my view. Half-year results should be out in just over a month from now, and can only imagine that the numbers will look rather good based on what we already know from Q1.

It will be interesting to see if the company decides to present a series of ex amortisation numbers to go alongside their statutory reporting. I hope they do, as that's what 99% of the market does, and what all materially acquisitive companies do. As some of this undervaluation is purely off investors not understanding that the reporting here is extremely understated and the income statement quite substantially understates the cash generation of the business. Regardless, the company should be in a good position for the rest of the year and beyond. hxxps://www.macfarlanepackaging.com/blog/how-are-you-preparing-for-increased-seasonal-demand/

Eric

[whittler100] 09/7/2021 10:11

Richard Leonard is in my opinion, a very clever investor but just like all of us he admits to selling some of his success stories too early: I think he sold UPGS and they went on to make substantial further gains. I rather think the same will happen with MACF where I remain very optimistic & hold within the family portfolios.

[pireric] 09/7/2021 09:44

Very brief <30 second mention from Richard L that he recycled into chemicals company Synthomer. Good luck to him! Ive probably taken some of his stock

Eric