Bargain shares: Priced to clean up

Creightons (CRL:82p), a Peterborough-based manufacturer of beauty and healthcare products, has made excellent progress in offsetting the loss of Covid-19 related hygiene product sales which contributed ‘one-off’ revenue of £11.5m in the same period in 2020.

Excluding the contribution from these hygiene products and acquisitions, first-half revenue surged by £8.4m to £29.2m. Branded sales increased by 47 per cent to £8m, buoyed by a strong performance from the group’s Feather & Down and Balance Active brands; private label sales returned to pre-Covid levels, up from £10.8m to £13.1m, with the reopening of the high street and the addition of a large contract with a key grocer; and contract manufacturing sales soared 76 per cent to £8.08m as major customers responded to higher consumer demand. It’s more profitable business, too, as lower Covid-related costs, reduced airfreighting and stock provisions helped drive up gross margin from 39.3 to 42.7 per cent.

The fact that underlying operating profit only declined from £3m to £2.6m despite the absence of the £11.5m one-off hygiene sales in the prior six-month period was a better outcome than I had expected. Moreover, with last summer’s acquisitions of Brodie and Stone (brands include T Zone, Natural World and Janina) and Emma Hardie Skincare set to make meaningful contributions in the second half, I would expect the profit shortfall to narrow. Combined the two businesses were making annual pre-tax profit of £0.55m on revenue of £9.6m prior to acquisition. Indeed, although Creightons lacks broker coverage, I feel that the company could still match last year’s adjusted pre-tax profit of £5.2m to deliver flat earning per share (EPS) of 6.6p.

The initial cash consideration paid for the two acquisitions, which also had net debt of £3m on completion, partly explains why Creightons’ net debt of £7.5m at the half-year end reversed a net cash position of £3.7m six months earlier. The other contributing factor was a build-up of trade debtors due to the profile of revenue throughout the period and higher investment in inventories, partly to mitigate against the risk of supply chain issues so to maintain its ability to fulfil customer orders promptly. Expect the working capital position to improve in the second half as cash is collected from customers. Internal operating cash flow will drive down net debt, too, from what is a comfortable 30 per cent gearing level.

Moreover, with second-half profits set to benefit from a full six-month contribution from acquisitions as well as manufacturing and management synergies that will drive a higher return on the newly acquired brands, then Creightons looks set fair.

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange

The shares have produced an 87 per cent total return (TR) since I included them, at 44p, in my market beating 2020 Bargain Shares Portfolio, during which time the FTSE Aim All-Share and All-Share indices have produced TRs of 23 per cent and 9 per cent, respectively. The shares also hit an all-time high of 136p after I last suggested buying, at 79p (‘Bargain shares: On the bargain hunt’, 22 July 2021), before profit taking took hold.

Trading on a 12-month trailing price/earnings (PE) ratio of 13.5, and on a price-to-book value ratio of 2.3 times, the directors’ ability to consistently produce a 20 per cent-plus post-tax return on equity is being undervalued. True, the 0.5p a share annual dividend is modest, but this is a capital growth story and one that is delivering. Buy.

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