Macfarlane grows profits despite lower demand

Much like the larger packaging players, Macfarlane (MACF) is experiencing a slump in customer demand. Organic sales wilted by 4 per cent in the first half of 2023, as ecommerce clients proved troublesome and price hikes failed to counterbalance volume declines. 

There is an important difference between Macfarlane and the likes of Smurfit Kappa (SKG) and Mondi (MNDI), however. Macfarlane is primarily a distributor as opposed to a manufacturer, and buys packaging off the big players. It has benefited, therefore, from struggles in the sector because it has been able to buy boxes at a lower price. 

This is reflected in the group’s gross margin, which rose from 33.8 per cent to 36.2 per cent in the period. This tight management of input prices helped to offset the impact of inflation elsewhere – particularly in the energy and labour markets – and Macfarlane’s operating margin also edged up. Overall, therefore, while sales only increased by 2 per cent, operating profits jumped by 12 per cent to £10.8mn.

Things could get tougher in the second half of 2023. Analysts at Stifel expect Macfarlane to deliver “flat overall revenue growth for the year, driven by price deflation despite stabilising volumes”. The company is also very exposed to online shopping, which still seems to be normalising in the wake of the pandemic. 

Over the longer term, Macfarlane looks resilient, with a diverse customer base, good client relationships, a host of new business wins and a big share of the UK packaging distribution market. We worry that things could get worse before they get better, though. Hold. 

Last IC View: Hold, 110p, 25 Aug 2022