New chief executive Adam Holland of niche small-cap packaging engineering group Mpac (MPAC:190p), a specialist provider of automated packaging systems, was in a confident mood during our results call. He had every reason to be.
First-half order intake almost doubled to £62.4mn on the same period in 2022 to boost the order book by 15 per cent to £77.5mn since the start of the year. Holland highlights that £29mn of the order intake is from high-margin healthcare, a segment that delivered 40 per cent revenue growth in the first half. Drivers include work on automated packaging equipment for contact lenses, intraocular lenses that are surgically implanted and glucose management products.
The group’s resurgent higher-margin service revenue is worth flagging up, increasing from £10.3mn in the first half of 2022 to £17.6mn and now representing a third of total revenue. The growth reflects multiple factors, including a more proactive approach to delivering customer upgrades and retrofits on equipment, effectively carrying out health checks that generate new business.
Analysts at house broker Shore Capital point out that Mpac’s service offering offers a key competitive advantage/point of difference for the group and a solid value-added proposition. That’s because customers benefit from increasing efficiency and predictive maintenance (namely, reducing costly downtime), thereby lowering their operating costs and boosting return on investment. It’s not the only reason the lowly rated shares offer re-rating potential.
A play on battery metals and clean energy
- First-half adjusted pre-tax profit up from £1.1mn to £1.9mn
- Order intake surges
- Closing order book rises 15 per cent
- Return to net cash position
- Board confident of doubling full-year pre-tax profit
- Forward PE ratios of 7.2 (2023) and 4.9 (2024)
Mpac offers exposure to clean energy, too. The group is supplying casting and unit cell assembly equipment to the Norwegian battery cell production line of Freyr Battery (US:FREY), a major developer of clean, next-generation battery cell production capacity. Holland says that several potential blue-chip clean energy customers are keeping a close eye on progress in Norway, suggesting scope for further clean energy/battery contracts.
Importantly, Holland confirmed that the board is “confident of delivering on full-year earnings estimates”, adding that first-half operating margin of 4.2 per cent would have been materially higher if Mpac had capitalised work on the Freyr contract rather than fully expensing it ahead of the second-half delivery. Many investors may have not realised this, one of several reasons why the 10 per cent post-results decline in the share price is likely to reverse.
Furthermore, given the high level of healthcare work in the order book, and with analysts expecting high-margin service revenue to remain robust, then the group’s second-half operating margin should more than double to 9.6 per cent on slightly higher revenue of £53.8mn. On this basis, analysts at both Shore Capital and Equity Development forecast a doubling of full-year pre-tax profit and earnings per share (EPS) to £7mn and 26p, respectively, on 9 per cent higher annual revenue of £106mn. This implies the shares are rated on a current-year prospective price/earnings (PE) ratio of 7.3.
Furthermore, with last year’s working capital build unwinding – Mpac reported a first-half net inflow of £7.3mn – as the directors predicted in the 2022 annual results (‘This niche packager is priced for recovery’, 22 March 2023), Mpac ended the period with net cash of £2.2mn, a sum that could rise to £3mn by the year-end. The margin rebuild will benefit next year’s profits, too, hence why both research houses are forecasting 50 per cent higher pre-tax profit of £10.5mn on consensus revenue of £118mn, implying shares in the £39mn market capitalisation company are rated on a miserly 4.9 times consensus EPS of 38.5p. The bargain basement rating is completely at odds with Mpac’s robust trading prospects. Buy.
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