Macfarlane navigates ecommerce slowdown

In the height of lockdown, the performance of packaging companies was boosted by the online shopping boom. Macfarlane (MACF) was no exception: retail accounts for more than a quarter of its packaging distribution sales, and its client list contains a host of well-known brands. 

The craze for online shopping has started to wane, however, as high streets return to life and the cost of living crunch suppresses spending. Nevertheless, Macfarlane managed to grow revenue by 14 per cent in the first half of the year, fuelled by the recovery of industrial clients in aerospace, engineering and hospitality. 

With demand proving resilient, costs are now the main concern. Macfarlane’s distribution division – which generates almost 90 per cent of turnover – saw its cost of sales rise by 12 per cent in the first half of 2022, while net operating expenses rose by 14 per cent. This resulted in a fall in operating profit, which was only counterbalanced by a strong performance by the group’s smaller manufacturing and design arm.

Supplier cost price increases, together with higher labour costs, were largely to blame. However, management is confident that the group can keep upping its prices, arguing that it has navigated the volatile world of polymer and paper prices for years while retaining a solid gross margin.

The group’s ‘buy-and-build’ strategy is progressing nicely, and Macfarlane has recently made its first acquisition in Europe. A strong history of free cash flow, together with financial headroom of about £21mn, means further purchases are likely.

However, inflation fears still weigh heavy and the group can no longer rely on a booming ecommerce market. Hold. 

Last IC View: Buy, 135p, 26 Aug 2021