- Annual cash profit beats analyst estimates by 10 per cent
- Acquisitions performing well
- PE ratio below seven and 6.7 per cent dividend yield
- Modest balance sheet leverage
Founded in 1989, and listed on the stock market since 1995, Wythenshawe-based Coral Products (CRU:16.5p), a maker and designer of plastic products, has undergone a dramatic transformation in the past couple of years and is yet to be appreciated by investors.
Led by chairman Joe Grimmond, the group has been pursuing a buy-and-build strategy in the UK’s highly fragmented plastic industry. The directors have bought wisely, as highlighted by the latest annual results to 30 April 2023, which incorporates four acquisitions:
Integration of the acquisitions has gone smoothly, so much so that Coral Products’ annual cash profit more than doubled to £3.8mn, well above house broker Cenkos Securities’ £3.5mn forecast, on 144 per cent higher revenue of £35.2mn. Furthermore, the earnings beat comes after the directors upgraded their guidance in May 2023 and Cenkos pushed through a 13 per cent cash profit upgrade at the time. In the event, underlying pre-tax profit surged 53 per cent to £2.3mn, which delivered 87 per cent higher earnings per share (EPS) of 2.6p, the latter being 15 per cent ahead of analysts’ previously upgraded estimates.
Post period-end, the group paid the full £1.27mn cash earn-out on the £3mn Alma Products acquisition, implying a multiple of six times the subsidiary’s annualised cash profit of £0.5mn, highlighting a well-executed strategy of buying businesses at modest prices and then generating synergies and efficiencies to drive higher levels of profitability.
Importantly, the group’s other existing businesses are performing well, too. Tatra-Rotalac, a specialist in PVC and plastic injection-moulding products for the building, telecom, aerospace, automotive and rail industries, continues to benefit from operational efficiencies and capital investment in new machinery. Global One Pak, a specialist in the design and distribution of lotion pumps in personal care products and trigger sprays in household products has expanded its product range to exploit the market opportunity with key supermarket customers (Tesco, Morrisons and Asda) and personal care product brands.
Post the financial year-end, Manchester-based Customised Packaging Limited, a company that designs and produces specialised packaging such as bespoke crates, cases and containers for transportation, has been merged with Manplas to centralise its operations and deliver synergies.
Positive trading outlook
Importantly, the positive momentum has continued into the new financial year, adding weight to Cenkos’ expectations of 15 per cent growth in annual cash profit to £4.45mn to drive pre-tax profit up 8 per cent to £2.45mn in the 12 months to 30 April 2024. On this basis, the shares are priced on a price/earnings (PE) ratio well below seven and offer an attractive 6.7 per cent dividend yield.
The six directors hold 19 per cent of the shares, so the payout is rock solid, and it means that debt levels are kept in check. Net borrowings of £7mn equates to 1.6 times forecast cash profit and implies balance sheet gearing of 50 per cent, so leverage remains comfortable.
The lack of institutional following and a small enterprise valuation of £21.9mn are the key reasons why the group is below the radar of investors, rather than operational underperformance, since the board embarked on its buy-and-build strategy two years ago. It’s a rating worth taking advantage of as the potential for strong profit growth and acquisition-driven upgrades should support a higher re-rating, hence why I suggested buying the shares, at 14.75p, six months ago (‘Alpha Research: This deep value small-cap bargain could pack a punch’, 6 March 2023).
To put the upside potential into perspective, a multiple of six times cash profit to enterprise valuation for the 2023-24 financial year implies a more reasonable PE ratio of nine and would drive a 36 per cent uplift in the share price to my 22.5p target price. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
