Morgan Advanced Materials (MGAM), still referred to as Morgan Crucible by old hands, has been something of an ugly duckling this year. While peers have re-rated sharply in advance of an anticipated uptick in earnings, Morgan has not and now trades at a significant discount to the sector, much of which stems from a profits warning over a year ago. Morgan, however, is highly geared to a global economic recovery, and management action should dramatically improve margins. So that discount looks set to narrow and there is a juicy dividend to enjoy in the meantime.
- Re-rating potential
- Reassuring trading update
- Self-help initiatives paying off
- Attractive dividend yield
- Weak top-line growth
- Strong pound
Clearly, the tougher than expected third quarter of 2012 tarnished Morgan's reputation. Then a slowdown in China and sluggish western economies badly affected the company's advanced materials & technology (AM&T) division, which supplies industry with carbon brushes, seals and bearings. A year later, conditions have stabilised, and a new regional structure will save up to £10m a year. After a steady third quarter, full-year sales should match the first half and book-to-bill ratios are up across the board and sit at just over one times.
For Morgan, however, the key driver will be margin improvement. Cost-cutting has already beefed up cash profit margin, and management, led by chief executive Mark Robertshaw, are targeting mid-teen margins and focusing on markets such as aerospace, healthcare and emission control where growth and returns are higher. Morgan has already earmarked loss-making or break-even businesses generating £20m of revenue for sale or closure, and a further £30m could follow. Broker JP Morgan believes that alone should generate a record-equalling operating margin of 12.9 per cent next year, up 180 basis points on forecasts for 2013.
MORGAN ADVANCED MATERIALS (MGAM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 289p | MARKET VALUE: | £825m | |
| TOUCH: | 288-289p | 12-MONTH HIGH: | 325p | LOW: 239p |
| FORWARD DIVIDEND YIELD: | 3.8% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 91p* | NET DEBT: | 73% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.02 | 81.5 | 18.3 | 7.70 |
| 2011 | 1.10 | 120 | 28.3 | 9.30 |
| 2012 | 1.01 | 96.2 | 23.2 | 10.0 |
| 2013** | 0.97 | 93.5 | 21.8 | 10.5 |
| 2014** | 0.97 | 104 | 24.1 | 11.1 |
| % change | - | +11 | +11 | +6 |
Normal market size: 8,000 Matched bargain trading Beta: 1.5 **Investec Securities estimates, adjusted PBT and EPS figures | ||||
Currently, 60 per cent of the business is achieving margin targets and Morgan is confident of the target-meeting potential of another third. Of course, much will depend on sales. Broker Numis estimates that over 30 per cent of any additional new revenue will drop through to the bottom line, and Investec Securities expects at least some sales growth in 2014. Improved pricing from greater investment in research and development (R&D) will further improve returns.
Of course, there's a sting in the tail. Morgan makes most of its money overseas, and Morgan has already admitted that a strong pound could shave up to 4 per cent off reported revenue and cash profit. Yet, even after last month's inevitable earnings downgrades, Morgan shares trade on just 12 times 2014 EPS estimates. That fails to factor in forecast 11 per cent earnings growth in both 2014 and 2015, and puts Morgan at an unusually large discount to the industrial engineering sector on 15.3 times, and electronic equipment on a forward PE ratio of on 16.6. An average of the two prices Morgan shares at 390p, implying at least 33 per cent upside. With either a quicker than expected economic recovery or greater cost savings, it could be more.
