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Zotefoams – sales surge but margins falter

The specialist foams manufacturer has driven sales ahead of pre-pandemic levels
August 10, 2021
  • Logistical supply chain issues constrict margins
  • A probable recovery in aerospace and automotive demand

Zotefoams (ZTF), a specialist in cellular materials technology – well, foam really – delivered a 46 per cent hike in half-year revenue at constant currencies, although the 14 per cent increase over the comparative period in 2019 is probably the more meaningful measure.

The real pressure came on further down the balance sheet from what management described as “significant supply chain inflationary pressures”. Because of the logistical issues, and the rise in polyolefin raw materials, the gross margin contracted by 590 basis points, partially cancelling out the operational leverage benefits linked to the sales surge. However, the supply chain issues have either been brought about by the pandemic, or perhaps exacerbated by it. So we might reasonably expect that margin pressure will eventually dissipate, although the likely timeframe is still difficult to judge because of the uncertain clinical situation. At any rate, gross profit was still 16 per cent to the good at £13.9m.

Operating cash flow was held in check due to an increase in working capital commitments from higher levels of business activity. And although net debt under the group's banking definition was flat on the end of 2020, it was equivalent to 1.9 times cash profits, down from 2.1 times from the year-end.

The High-Performance Products segment (41 per cent of group revenue) continued its pattern of sales growth, with demand linked to footwear production soaring over the period. And we should witness a gradual recovery in sales volumes linked to the aerospace and automotive sectors as they groan back into life. Peel Hunt has the free cash-flow yield flatlining through this year before hitting 4.1 per cent in 2022. But a forward multiple of 30 times forecast earnings suggests the market is already pricing in the recovery in end-markets. Hold.

Last IC view: Hold, 422p, 23 Mar 2021

ZOTEFOAMS (ZTF)   
ORD PRICE:449pMARKET VALUE:£218m
TOUCH:440-449p12-MONTH HIGH:530pLOW: 350p
DIVIDEND YIELD:1.4%PE RATIO:27
NET ASSET VALUE:199pNET DEBT:37%
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202034.62.704.482.03
202148.24.006.522.10
% change+39+49+46+3
Ex-div:09 Sep   
Payment:08 Oct