Macfarlane set to re-rate

While Macfarlane does face competitive pressures and tough conditions in some of its end markets, 2014's results proved it has the wherewithal to prosper despite these challenges. The bulk of Macfarlane's business is in packaging distribution, which accounted for 83 per cent of sales last year and 87 per cent of profit. Acquisitions are helping drive growth and improve the division's long-term prospects. Last year, packaging achieved 4 per cent organic sales growth and a further 5 per cent through the purchase of Lane Packaging and Network Packaging. Significantly higher returns should be generated from the acquisitions in 2015 as they are fully integrated.

Importantly, acquisitions are being used to increase Macfarlane's exposure to growth areas. Network Packaging is a case in point as it has good exposure to the internet retail sector, which typically uses more packaging than high-street retail and is an important source of growth. This trend is set to continue, with the £50bn online retail market expected to expand by 10-15 per cent a year. Macfarlane has also been enjoying good growth from national accounts, which benefit from the group's network of 18 regional centres.

The recent acquisitions have increased Macfarlane's debt pile, which grew by £4.2m to £10.1m during 2014. But the balance sheet benefited during the year from the £2.8m proceeds from a share placing to help fund the Network deal at 37.5p. While debt is not high, a £13.9m pension deficit makes it look rather more egregious. Nevertheless, a £20m banking facility with Lloyds Bank should cover the cost of future acquisitions.

It is hoped another deal - of a similar size to the Lane and Network buyouts - can be completed by the summer. There should be plenty of potential targets available. The £500m-a-year packaging industry is geographically fragmented, consisting of numerous regional or local players that do not have Macfarlane's national profile. Buying smaller packaging businesses - often privately owned by managers looking to exit through a sale - should provide further synergies with its logistics network.

The group's profitable manufacturing business - which makes products ranging from labels to corrugated cases - had a more subdued 2014 than packaging, owing to a loss of market share by key self-adhesive label customers and the relocation of part of the division to Wicklow, close to the company's major customer in Ireland, which pushed up costs. Cost increases are soon expected to be recovered, though, and strong growth in the sale of resealable labels should help the division to beat the £0.9m operating profit achieved in 2014.