BPI has bags of potential

By nature, BPI is a relatively low-margin business, which helps explain why its shares, rated at less than 10 times forecast earnings, are priced at a steep discount to more high-tech manufacturing peers. But even by their own standards, the shares currently look cheap following a period of intense input-price volatility and unfavourable currency movements. Indeed, while polythene - BPI's key raw material - may be made using crude oil, European polymer prices climbed nearly 50 per cent to a record high in the first half as production outages led to major shortages.

Senior management described this scenario as "the most difficult period of raw material prices" they've ever encountered. And while BPI usually passes on price swings to customers as quickly as possible, the market volatility made this "exceedingly challenging". But not only did the company deal with these problems with aplomb, but volatility seems to have eased off in August and input prices have started to head south.

Despite polymer prices and the added headache of a weak euro, BPI managed 6 per cent operating profit growth in the first half. On a constant-currency basis profit was up 13 per cent. And management widened margins by improving the sales mix and increasing operating efficiencies, which ultimately triggered a 4 per cent rise in operating profit per tonne to £114.

It's not just cheaper, more stable raw-material prices that look set to boost profits, either. A costly delay installing a replacement plant in Canada has now been rectified, and the group also looks well-placed to prosper from investment in its UK, European and North American markets, especially as economies in these countries improve.

Aside from growing capacity, BPI is focused on improving efficiency and reducing scrap, labour and energy costs. Enhancing the productivity and capability of equipment bodes well for earnings, although hefty capital expenditure in 2015 will weigh on cash generation in the short term. Analysts at Investec forecast free cash flow to fall to £6m in the year to December, before sharply rebounding to £15.5m the following year.

So far, investment in new blown-film extrusion technology in the UK and Holland has triggered better output and product specification. Moreover, at the halfway point increased capacity in silage stretch-wrap on the continent helped spur a 2 per cent improvement in total sale volumes to 157,400 tonnes.

Its this type of activity that has made BPI such a consistent performer over recent years. Chief executive John Langlands, who's been with the company since 1994, is focused on cost-cutting, investment in state-of-the-art products and maintaining high levels of customer service. This has enabled BPI to carve out a strong position in buoyant markets. That's had a notable impact on the bottom line, as the group has more than doubled operating profit since 2008. Part of Mr Langlands' success has been based on focusing on industries less vulnerable to the economic cycle, such as agriculture, food retailing and healthcare. But demand still stands to see some benefit from improvements in the the wider economy.

Management should also be commended for work done on the balance sheet. Net debt may have crept up £5m to £29m in the opening six months of the year, but £9m of capital expenditure and a £11.2 pension payment looks like money well spent. At £60m, the pension deficit has dropped 40 per cent, freeing up more capital to grow the business and maintain BPI's progressive dividend policy. A current yield of 2.3 per cent doesn't exactly shoot out the lights, yet it's still a nice extra to accompany the group's encouraging growth prospects.