Zotefoams’ profits up 30%, but volume is down

Zotefoams (ZTF) manufactures and sells foam to footwear companies, as well as the aviation, automotive and rail sectors. In the first half of 2023, the group managed to increase revenue by 9 per cent to £64.6mn, which – with the help of more predictable input costs and currency tailwinds – drove a 30 per cent increase in pre-tax profit. 

It is important to note, however, that growth has been fuelled by price hikes as opposed to volume progress. Despite a strong performance from the footwear division – and the renewal of an exclusive Nike contract – total volumes fell by 4 per cent year on year, mainly due to lower demand in Europe and the Far East. This was offset by price hikes that were “reflective of the input costs in the period”. 

Zotefoams expects input costs to fall, and it is “realigning prices in some products and markets”. Low-density polyethylene, for example, which is the group’s main raw material, peaked in the second quarter of 2022. If demand remains soft, however, lowering prices could affect future growth – something that we have started to see among cardboard packaging companies. 

Zotefoams also has its lossmaking MuCell Extrusion arm to contend with. The division develops and licenses foam technology, and reported a loss after amortisation costs of £2mn in the period. Management said it did not intend to impair its carrying value yet, and stressed the money-making potential of ReZorce, a “recyclable barrier packaging solution” being tested. According to management, this is a “high-risk development with the potential for commensurately high rewards for success”.

This certainly sounds promising, but we remain wary of the short-term outlook, which will be shaped by squeezed consumer spending and industrial deflation, which is likely to lead to inventory reductions in some markets. Hold.

Last IC View: Hold, 337p, 21 Mar 2023