- Eye-catching gross margin improvement
- Underlying operating profit up 23 per cent to £1.7mn
- First-half revenue down 2 per cent to £17.2mn
First-half results from plastic products maker and designer Coral Products (CRU:15p) highlight the virtues of the old saying: 'Turnover is vanity, profit is sanity and cash flow is king'.
The Wythenshawe-based group has been pursuing a buy-and-build strategy in the UK’s highly fragmented plastic industry, making four acquisitions in 2022. Although revenue dipped slightly to £17.2mn in the six months to 31 October 2023, as management had anticipated, this reflected the decision to exit £2mn of low-margin contracts. The shortfall was replaced by organic sales growth from higher margin lines mainly in the rigid product segment.
As a result, gross margin improved from 27.1 to 34.8 per cent, the effect of which was to boost gross profit by a quarter to £6mn. Profitability is also being enhanced by recent investment in key machinery to improve operational efficiency and productivity. The directors anticipate further benefits from ongoing capital projects in the second half of the financial year which adds weight to analysts' forecasts of 12 per cent growth in full-year pre-tax profit to £1.9mn on flat revenue of £35.2mn. On this basis, expect 9 per cent higher earnings per share (EPS) of 2.4p, implying the shares are rated on a price/earnings (PE) ratio of 6.2. It’s not just profit that is heading in the right direction, cash flow is too.
The £13.5mn market capitalisation company is forecast to deliver annual free cash flow (FCF) of £2.2mn, implying the shares offer a thumping FCF yield of 16.2 per cent. The cash generation not only funds the £1mn cost of the 1.1p a share full-year payout, which supports the 7.3 per cent dividend yield, but it should enable Coral Products to slash year-end net debt by 15 per cent to £3.9mn, so freeing up firepower for bolt-on acquisitions.
Strategically, the board made a sound call in recruiting Lance Burn as chief executive to drive the business forward, thus enabling Joe Grimmond to become non-executive chairman, having previously led the acquisition strategy. As interim chief operating officer of IG Design Group (IGR), one of the world's leading designers and manufacturers of gift packaging, craft and stationery, Burn led the turnaround of its loss-making North American division.
The high yielding and lowly rated shares are trading around my entry point, having outperformed the FTSE Aim All-Share index by 13 per cent since I initiated coverage (‘Alpha Research: This deep value small-cap bargain could pack a punch’, 6 March 2023). Buy.
■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.
They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com
