Genuit protects profits from price pressures

Plastic pipe maker Genuit (GEN) recorded strong growth even without the impact of the three acquisitions it completed last year. Like-for-like revenue grew by almost 30 per cent year on year and was almost 13 per cent higher than in 2019 before the pandemic hit.

Its underlying operating margin of 16 per cent was a significant improvement on the 10.6 per cent recorded in 2020 but below 2019 levels.

One reason for this is the lag in covering spiralling raw material costs. Prime PVC prices rose 50 per cent last year and although the company announced four price rises to try to keep pace, inflation still hit its underlying earnings to the tune of about $6.3mn. Chief financial officer Paul James told investors on a call that the increases it has implemented should mean typical margin levels are restored by the end of the current quarter.

Genuit also offsets some raw materials costs through the use of recycled plastic, which is priced at a discount to prime PVC. Almost half (49.4 per cent) of its total tonnage is now made up of recycled materials and it has a goal to push this to 62 per cent by 2025.

The £236.4mn spent on its three purchases – Adey, Nu-Heat and Plura – was partly funded through a £96.3mn capital raise, but net debt excluding leases increased by about £130mn to £145mn. The company plans to cut its net debt-to-cash profits ratio of 1.2 per cent this year, barring any new merger deals.

Broker Jefferies forecasts adjusted forward earnings per share of 36.2p. The company is currently valued at 14 times this level, which doesn’t look too expensive given the prospects for growth in its end markets and its broad spread of customers. Buy.

Last IC View: Buy, 686p, 17 Aug 2021