Self-help measures boost Essentra

Given the destocking that was taking place in many of its end markets last year, it’s probably still a little too early to gauge how successful Essentra’s (ESNT) big break-up plan has been.

It sold off two of its three main operating divisions – filters and packaging – in 2022 to focus on components, and used the £385mn of proceeds to repay debt and return £150mn to shareholders through dividends and buybacks.

Although the company can point to an 85 per cent increase in adjusted operating profit at constant currency rates last year – delivered entirely through margin improvement, given the 4 per cent decline in its top line – this is after some fairly chunky adjustments compared with the level of its statutory profits. It made £21mn of adjustments, almost as much as the £26mn announced in 2022 when the break-up took place. Chief executive Scott Fawcett said that he expects “most” of these adjusting items not to repeat and also pointed to a big reduction in costs, with central overheads dropping from £23.1mn to £11.6mn. 

Broker consensus on the shares is universally bullish, with Panmure Gordon pointing out that Essentra's low leverage (net debt stands at one times adjusted cash profit) gives it plenty of firepower for acquisitions. Fawcett expects to complete at least one bolt-on deal in the second half, but wants to “be certain the market recovery is behind us” before considering anything larger. 

We feel similarly about Essentra – we’d prefer to see sustained evidence of progress as a standalone components business given that its shares are valued at 14 times FactSet consensus forecasts, which is only a slight discount to their five-year average. Hold.

Last IC view: Hold, 155p, 16 Aug 2023