Zotefoams' low rating ignores bright future

True, the first half of 2016 was not altogether good for Zotefoams. It suffered a 12 per cent rise in input prices due to sterling's weakness and disruptions at a major supplier. This was compounded by destocking by customers in continental Europe and Japan. However, to put these upsets in context, sterling's weakness is actually a net positive for the Croydon-based manufacturer as it generates a significant amount of costs in the UK while 80 per cent of sales come from overseas. The company's hedging policy means much of the benefits of sterling's weakness will be pushed into 2017. What's more, while the first half was slow in some areas of its business, a pick-up in demand had already materialised when the company reported half-year results in August, which gave management enough confidence to predict "growth expectations across all business units".

Indeed, a buoyant longer-term demand outlook has prompted the group to undertake significant investment in its facilities. Operational improvements have already been made at its Croydon factory and, following some initial delays, the company is spending $30m (£23.5m) on expanding capacity by one-fifth at its US factory in Kentucky.

The group is also putting money into some exciting innovations, such as foam production using 3D moulding and printing technology, which could substantially reduce the waste and time associated with cutting down foam blocks. Meanwhile, its high-performance productions division is seeing increased interest for its cutting-edge lightweight products from the automobile and sportswear industries. And Zotefoams is seeing increased orders and interest in its carbon-reducing MuCell packaging foam and machines. Progress is now also being made with its Chinese joint venture to make T-Fit clean insulation foam following problems with the original site.

These initiatives are costing money, and capital expenditure during the first half came in at £8m compared with £9.1m for the whole of last year and £7.6m the year before. This contributed to a rise in first-half net debt from £1.6m to £7.2m; however, this still represented just 60 per cent of last year's cash profit. Falling bond yields also mean that Zotefoams' pension obligations increased by £2.4m to £7.62m at the end of June, putting some further pressure on the balance sheet. But while heightened investment is forecast to lead to negative free cash flow of £6.8m this year, the peak in year-end net debt is forecast to be a manageable £12m in 2017, and as the spending eases off the group is forecast to generate £7m of annual free cash come 2018.