- Order intake and closing order book both surge 41 per cent to £117.9mn and £78.4mn
- Underlying pre-tax profit up 36 per cent to produce EPS of 39.7p
- Equipment order book and service revenue cover 95 per cent of 2022 forecast revenue
- Ohio-based Switchback continues to exceed expectations
Small-cap niche packaging engineering group Mpac (MPAC: 505p), has posted a 5 per cent earnings beat and that’s after analysts upgraded their full-year estimates by 5 per cent at the half-year results (‘Bargain Shares: On the hunt for value’, 6 September 2021). There are multiple growth drivers at play here.
Firstly, two-thirds of last year’s revenue of £94.3mn came from North America, a region that has posted a strong economic recovery following the Covid-19 induced recession. Management has leveraged what remains a favourable backdrop by adding breadth to Mpac's carton and end-of-line solutions through the September 2020 acquisition of Ohio-based Switchback. That business has increased the group’s potential customer base to build sales in North America, and is exploiting cross-selling opportunities across the enlarged group’s enhanced product and services offering.
In addition, secular factors are driving growth. That’s because Mpac occupies a significant position in the manufacturing and distribution chain as a specialist provider of automated packaging systems. Manufacturers in its core healthcare (48 per cent of 2021 revenue), food & beverage (48 per cent) and pharmaceuticals (5 per cent) sectors need to meet regulatory requirements at high levels of volume output for sealed, packaged and packed product. Mpac’s solutions help them achieve exactly that.
Moreover, the move by companies to automation and the use of AI-enabled robotics to improve production efficiency was already accelerating due to the Covid-19 pandemic, but the spike in inflation coupled with labour market pressures is likely to boost end market demand even more. Mpac is a major beneficiary of these secular market trends as well as the move towards environmentally friendly solutions that are being adopted by manufacturers.
Mpac is also delivering on a contract with FREYR Battery (US:FREY), a $1bn market capitalisation New York Stock Exchange listed group, to supply casting and unit cell assembly equipment for lithium-ion battery cell production at its Norwegian plant. The key end markets are electric vehicles and domestic storage. The FREYR contract accounts for just under 10 per cent of this year’s order book and work (on the initial development line) is on track to complete before the year-end. Chief executive Tony Steels says that “we are working hard to develop a partnership agreement for other FREYR facilities in Norway and Finland”. He highlights a much wider global opportunity across this fast-growing market.
Bearing in mind the robust order book and inflationary backdrop, Mpac has built up inventory levels to mitigate the impact of longer supply chain lead times for electronic components, and is “receiving preferential treatment from its major [blue-chip] suppliers”, says Steels. The spike in energy prices is not an issue as Mpac only incurred £250,000 of energy costs last year.
Analysts at both house broker Shore Capital and Equity Development have identical forecasts for the year ahead, pencilling in conservative looking pre-tax profit of £8.8mnn on 11 per cent higher revenue of £105mn. This implies the shares are rated on a forward price/earnings ratio of 13, or half the average rating for US machinery and manufacturers. Admittedly, Mpac doesn’t pay a dividend, preferring to use its £13.6mn net cash pile and £3.9mn of forecast free cash flow this year to grow the business organically and perhaps by targeting more complementary acquisitions.
Mpac’s share price has more than trebled since I included the shares, at 156p, in my 2018 Bargain Shares Portfolio, albeit the price has declined from the 633p level since I covered the half-year results six months ago. The earnings beat, strength of the order intake, structural growth drivers and modest rating all suggest that a return to those autumn’s highs is more than warranted. Buy.
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