Shares in specialist plastics supplier Plastics Capital (PLA) offer a chance to pay a multiple of just seven times forecast earnings for a stake in a company that, according to one City analyst, is capable of delivering 20 per cent a year growth over the next five years. In addition, its dividend could rise to the extent that it will generate a 5 per cent yield in 2014-15. Maybe that is why Arun Nagwaney, a former director and founder of the company, recently spent £140,000 on 171,000 shares at 81.5p, taking his stake to 8.2 per cent.
- Strong positions in niche markets
- New business wins supporting prospects
- Rapid dividend increases forecast
- Potential for significant acquisition
- Weak European markets
- Dull recent performance
True, Plastics Capital's performance in 2012-13 will be duller (see table). This is due to dire conditions faced by its European customers and disruption caused by floods in Thailand, where it has a factory. But the resilience shown over the period nevertheless demonstrates the qualities that make this company an attractive small-cap growth play.
The company's ability to win new business and achieve great profit margins for a chemicals company is down to its technological knowhow, international sales spread and focus on four niche markets - plastic ball bearings, which don't corrode and need no lubrication; high-end plastic bags and sacks; consumables for folding cardboard into box shapes; and Bell Plastics, which makes specialist plastics for rope and hose makers.
The value of its expertise means Plastics Capital consistently makes operating profit margins of over 10 per cent - they slipped below this level only at the height of the financial crisis. This is far better than most plastics companies achieve. The company also claims strong business relationships through involvement in the design process with its clients, many of which are multinationals, such as LG and Canon.
| PLASTICS CAPITAL (PLA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 82p | MARKET VALUE: | £22.6m | |
| TOUCH: | 77-82p | 12-MONTH HIGH: | 87p | LOW: 65p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 72p | NET DEBT: | 43% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) † | Earnings per share (p) † | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 26.7 | 2.98 | 8.0 | nil |
| 2011 | 33.5 | 3.87 | 10.2 | nil |
| 2012 | 32.1 | 3.77 | 10.1 | 1.0 |
| 2013* | 31.5 | 3.70 | 11.0 | 2.0 |
| 2014* | 33.5 | 4.10 | 12.3 | 3.0 |
| % change | +6 | +11 | +12 | +50 |
Normal market size: 1,000 Market makers: 4 Beta: 0.1 †Underlying figures *First Columbus Investments forecasts | ||||
Following some tough years, there are solid grounds to hope for an improved performance. For starters, conditions in Europe may have bottomed out. Meanwhile, the company has been winning new customers and claims a technological breakthrough that should expand the market for plastic ball bearings. Plastics Capital has also recently increased its production capacity for industrial packaging and has invested in a ballbearings factory in China, which will allow it to break into this market. Sterling weakness will also help due to the focus on exports and its four factories in the UK.
Meanwhile, over the three years to September 2012 net debt has been cut by £10m to £8.6m, which is just 1.7 times forecast cash profits, and falling. This prompted Plastic Capital's bosses to say in November that conditions for acquisitions were as favourable as they had seen them since 2008. Even without an acquisition, good growth is expected to come through and brokers reckon that a big order from the car industry could be imminent. Geoff Allum, an analyst at broker First Columbus, also expects the dividend to rise by 1.1p a year at least until 2014-15. Given that the payout was covered 10 times by earnings in 2011-12, this looks likely.
