The UK is expected to be one of the fastest growing major European economies in 2014, and investors hunting for exposure to domestic earnings growth would do well to wrap up shares in Macfarlane (MACF) within their Isa allowance. The London-listed protective packaging company's earnings are geared to an improving economy and look set to ramp up in 2014 and beyond through a combination of new business wins, internet retail growth and bolt-on acquisitions.
- Exposure to improving UK economy
- Growth boost from internet orders
- Attractive valuation
- Growth through acquisition
- Pension deficit
- Wide share spread
True, selling generic and bespoke cardboard boxes, labels and plastic films to manufacturers is hardly the sexiest of growth businesses. But Macfarlane is the leading player in the £500m-a-year market with 20 per cent shares. And shares in the company appear undervalued on just 10 times forward earnings and boasting a more-than-twice-covered 4.2 per cent prospective dividend yield.
Moreover, Macfarlane's chief executive Peter Atkinson expects the business to turn a corner in 2014 after several years of pricing pressure and subdued demand. Macfarlane has done this by targeting growth markets such as internet retail and third-party logistics companies, while keeping a tight lid on overheads.
Key contract wins earlier this year with online retailers ASOS (ASC), The Hut and Feel Unique led to a step-up in underlying revenue growth to 3 per cent in the fourth quarter of 2013, up from an average of 1.5 per cent throughout the year. Encouragingly, Mr Atkinson says the improvement in trading has been sustained into the current quarter. Profits before tax and exceptional items rose to £5.1m in 2013 from £4.5m in 2012.
MACFARLANE (MACF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 39p | MARKET VALUE: | £44m | |
| TOUCH: | 38-39.5p | 12-MONTH HIGH: | 41p | LOW: 26p |
| FWD DIVIDEND YIELD: | 4.4% | FWD PE RATIO: | 10 | |
| NET ASSET VALUE: | 23p** | NET DEBT: | 22% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit* (£m) | Earnings per share* (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 145 | 4.3 | 3.4 | 1.55 |
| 2012 | 142 | 4.8 | 3.1 | 1.55 |
| 2013 | 144 | 5.3 | 3.6 | 1.60 |
| 2014* | 148 | 5.7 | 3.8 | 1.65 |
| 2015* | 150 | 6.1 | 4.0 | 1.70 |
| % change | +1 | +7 | +5 | +3 |
Normal market size: 3,000 Matched bargain trading Beta: 0.42 *Arden Partners' adjusted figures and forecasts **Includes intangible assets of £25.4m, or 22p a share | ||||
Macfarlane's debt and pension deficit have held back the rating in recent years as they have absorbed a good chunk of Macfarlane's cash flow. But net debt has now come down to a comfortable £5.9m and interest payments are covered more than five times by earnings. And Macfarlane recently agreed to a new three-year credit facility with Lloyds that extends up to £20m. Meanwhile, the pension deficit is falling, too, and reached £15.9m at year-end, down from £20.5m two years ago. Rising interest rates on gilts going forward should also reduce the deficit. Management is now confident enough in the group's finances to have recommended the first dividend increase in three years.
Mr Atkinson says Macfarlane's strategy is not reliant on a UK economic recovery and he expects to build revenues organically and through small acquisitions, with broker Arden forecasting sales rising to £180m over the next three years. "As we go into 2014, we have a pipeline of acquisition activity that we're currently working on that would enable us to improve the growth rate over and above forecasts," says Mr Atkinson.
Broker Arden Partners has pencilled in mid to high single-digit EPS growth in 2014 and 2015. They expect the shares to rerate to a multiple of "at least 13 times" and have set a target price of 50p.
