Mpac’s share price has doubled – and it's still a bargain

Mpac (MPAC:405p), a specialist provider of automated packaging systems, is firing on all cylinders, having returned to a growth trajectory and doubled annual pre-tax profits to £7.1mn as management had guided investors to expect.

The performance was buoyed by record order intake, a normalisation of margin and the operational leverage of the business. In addition, as global supply issues that extended the working capital cycle in 2022 started to ease, Mpac generated £4.7mn from working capital movements to return to a net cash position.

In terms of the business mix, original equipment manufacturer (OEM) revenue increased 10 per cent to £82.4mn, or 72 per cent of group revenue, underpinned by growth in Asia (up 22 per cent to £34mn), Europe, the Middle East and Africa (EMEA) (up 29 per cent to £7.6mn) and recovery in Mpac’s traditional healthcare, food and beverage markets. The same sectors and regions were key drivers behind the 38 per cent increase in service revenue to £31.8mn, with the Americas also delivering a notable contribution (revenue up a third to £15.9mn).

The increasing contribution from the service side of the business reflects a proactive approach to deliver customer upgrades and retrofits on equipment, effectively carrying out health checks that generate new business. Mpac’s blue-chip client base has an installed base of around 4,000 machines across 80 countries and many customers now see Mpac as a core service provider and manufacturing partner that can deliver smart technologies into legacy equipment to improve their efficiency and reduce expensive downtime.

The group is also capitalising on the opportunity in clean energy not only through its work on the Norwegian battery cell production line of Freyr Battery (US:FREY), a major developer of next-generation battery cell production capacity, but with Ilika (IKA), a company engaged in developing and commercialising lithium-ion batteries. The segment accounts for 8 per cent of group revenue.

Prospects for 2024 well underpinned

Importantly, the momentum has continued into the new financial year, giving weight to analysts’ expectations that Mpac can deliver almost 50 per cent higher annual pre-tax profit of £10.5mn and earnings per share of 39p. This is based on 5 per cent growth in 2024 revenue to £120mn and an improvement in the full-year operating margin from 6.8 to 8.9 per cent, in line with the margin delivered in the second half of 2023.

On this basis, the shares are rated on a price/earnings (PE) ratio of 10.5, materially below the average PE ratio of 17.5 for peers in Equity Development’s space. Mpac’s 12-month forward cash profit to enterprise valuation multiple is half that of peers, too.

True, the progress has not gone unnoticed, with the share price rallying 25 per cent since I highlighted the opportunity at the start of the year (‘Mpac shares have rallied – but it's still on a 35% discount’, 16 January 2024), and more than doubling since my buy call at the interim results (‘Mpac’s CEO is bullish and rightly so’, 8 September 2023). However, with margins set to recover further and robust order intake de-risking earnings forecasts, the ongoing rally has scope to achieve analysts' fair valuation prices of 500p (Liberum), 530p (Equity Development) and 500-600p (Shore Capital). Buy.

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