Accrol review defies gravity

Accrol (ACRL) prides itself on being the UK’s leading independent tissue converter. In other words, a producer of toilet tissue, kitchen towel, and biodegradable wet wipes.

Given recent history, you would imagine that market trends have been running in its favour, particularly as consumers ditch name brands in favour of value options. It's true that the top line has risen appreciably since 2019, but a positive transition from gross profits through to net earnings has proved elusive. The group’s interim sales surged through to the end of October, but the gross margin – at 18 per cent – is down by 6.7 percentage points year on year, continuing the slide that was evident at the group’s April year-end.

Accrol’s chief executive, Gareth Jenkins, said the group “successfully leveraged [its] supply position with customers to recover all additional costs incurred in the period”. But there were no apparent scale benefits flowing through to net earnings despite a 14 per cent increase in volumes, suggesting that any claw-back of rising input costs will be a lagged affair.

To counter rising costs and supply chain disruption, the group has increased inventories by 77 per cent since the 2021 half year. Net borrowing has also swollen through the period, although management points to a multiple equivalent to a manageable 1.5 times cash profits.

The outcome of a strategic review, undertaken in 2022 with the support of Deloitte, was published alongside the half-year figures. In short, it prioritises the construction of a sustainable paper mill and the return of cash to shareholders through dividends and/or share buybacks. Unfortunately, these ambitions seem at odds with the group's current finances – last April’s quick ratio came up well short of the five-year average of 0.66, as per FactSet. Admittedly, the shares were marked up on results day, but the 23 per cent premium to net asset value is difficult to justify. Sell.

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