Eurocell cuts costs to mitigate new-build weakness

Looking at prospects for a company such as Eurocell (ECEL), you need to consider the extent to which its products are subject to cyclical turns. Unfortunately, as a manufacturer, distributor and recycler of building products, it has been faced by weaker new-build activity and margin pressure brought about by “increased competition for limited demand”.

The negative economic impact of rising input costs and interest rates became more obvious as 2023 progressed. Adjusted profit before tax – down 47 per cent at £15.2mn – was in line with market expectations, reflecting margin pressure brought about by rising bills for labour, electricity and recycling feedstock (Eurocell is the leading UK-based recycler of PVC windows).

To counter these external factors, management prioritised inventory management and selling price increases “where possible”. Consequently, it was able to book a net working capital inflow of £13.4mn against a net outflow of £13.1mn in 2022. Restructuring measures implemented at the tail-end of 2022 reduced annual operating costs by £5mn, helped along by staff redundancies. The positive working capital position helped to boost net operating cash flow, although Eurocell closed out 2023 with £0.4mn in cash on its books. The company saw a £4.7mn decrease in net cash and equivalents through the year, but beyond its lease liabilities, Eurocell had no bank borrowings at the period-end.  

Management deserves credit for decisive action on the cost front, but the pressure on sales volumes is reflected in the marked reduction in the annual dividend. The group’s forward rating of 7.7 times consensus earnings and an implied dividend yield north of 6 per cent could represent a viable entry point assuming interest rates retrace, but it would be unwise to move forward solely on that basis. Hold.   

Last IC view: Hold, 155p, 1 Sep 2022