Morgan Advanced Materials shrugs off cost pressures

Morgan Advanced Materials (MGAM) endured a difficult lockdown. Sales at the specialist manufacturer plunged as demand from key clients - particularly those in aerospace and transportation - dried up. 

Morgan is back and better than ever, however, and has comfortably overtaken pre-pandemic figures. The group serves a wide variety of end markets, including healthcare, energy, transportation, petrochemicals and defence, and manufactures a broad range of products. Impressively, sales across almost every division have grown year-on-year, with semiconductors putting in a particularly good showing. 

Management breaks down operations into “core markets” and “faster growing markets”, which include semiconductors together with clean transport, clean energy and healthcare. The latter - as the name suggests – is expanding the quickest, increasing organic revenue by 15 per cent in the period. Going forwards, growth opportunities look abundant as end markets continue to swell. 

One of the major issues for manufacturers at the moment is, of course, inflation. But Morgan has managed to widen its adjusted operating profit margin by almost a percentage point to 13.7 per cent. Management attributed this to organic growth and its restructuring programme, which involved shutting various factories last year. 

Its free cash flow is less appealing, falling from £36.5mn in 2021 to an outflow of £1mn this year. This is due in part to significantly higher capital expenditure, which has returned to “more normalised” levels. However, cash generated from continuing operations also fell steeply, from £63.1mn in 2021 to £45mn in 2022. Management attributed this to higher working capital as a result of a bigger inventory, which in turn is a result of supply chain fears.

It is worth noting, however, that trade receivables are also up by 21 per cent, despite the group only reporting revenue growth of 15 per cent. 

Peel Hunt analysts are very bullish. The broker concludes that Morgan’s core operations are in “scalable businesses in attractive markets”, and that the platform is now robust enough to scale up.

 “The company has broken through a glass ceiling of 30p of earnings (previous high of 29.9p in 2011) and we see the increasing realisation of the potential in this reality driving a major rerating over the next 24 months,” Peel Hunt said.

With a forward PE ratio of just 9.8 - compared with a five-year average of 11.6 - shares look to be good value, and momentum is building. Buy. 

Last IC View: Buy, 312p, 4 Mar 2022