Morgan Advanced Materials rebounds after pandemic hit

Specialist materials manufacturer Morgan Advanced Materials (MGAM) is getting closer to pre-Covid-19 trading conditions, with 2022 sales forecasts raised despite new questions about the global industrial recovery. 

Morgan supplies the health, energy, transport and automotive industries with a wide variety of products, from carbon brushes to cold storage packaging for the transport of vaccines, with sales split between two main divisions: thermal products and carbon & technical ceramics.  

Both saw strong sales growth in 2021, at 11 and 10 per cent, respectively, on a constant currency basis. Thermal products swung back to an operating profit of £44mn, compared with a loss in 2020, whileceramics saw a £51mn increase to £67mn. The seals and bearings sub-division, part of the ceramics unit, saw sales fall in 2021 due to lower revenues from ceramic armour for vehicles, which given current events are likely to be more in demand this year.  

Higher costs were more than covered by higher prices: Morgan’s adjusted operating profit margin climbed from 10.1 per cent to 13.1 per cent. This was the highest margin in over 20 years, the company said, while Investec analysts forecast a 14 per cent operating profit margin in 2022. The analysts reduced this figure by five basis points on the release of the 2021 numbers, but said Morgan’s pricing power would continue to “more than offset” increasing costs.  

Chief executive Pete Raby said Morgan had made “good progress” in company goals such as cutting costs despite supply chain difficulties. The company finished a restructuring plan last year that included shutting factories, and found £20mn in savings for the year, which will grow to £23mn for 2022. 

The higher cash flow allowed Morgan to both increase the dividend and cut net debt, which was down more than a third to £97mn. The final payout of 5.9p took the total payout closer to the former yearly dividend of 11p. Investec forecasts a return to this level for 2022. 

The improved outlook brought on excitement in the market, pushing Morgan’s share price up 9 per cent. It is still down a quarter from the September level of over 400p, but as a defensive stock with exposure to energy, healthcare and armour, with the added advantage of a consistent dividend, investors will likely come back in the coming months.

Margin growth is not going to last forever – someone has to stump up that extra cash down the line, be it consumers or government buyers – but even a return to 10 per cent would still see Morgan on a strong footing. Buy. 

Last IC View: Hold, 220p, 31 Jul 2020