Paper and packaging stocks have been weighed down by an unfavourable card and paper pricing environment of late, while a number of sluggish key end markets, particularly in high-street retail, have also hampered earnings. Average selling prices have come down after reaching highs in 2018, which has squeezed profits. None in the sector can be totally immune to these risks, but we think Macfarlane (MACF), which is primarily a distributor rather than a manufacturer, could give investors their safest exposure to positive long-term packaging trends.
Resilience to weak markets
Opportunities in e-commerce
Improving margins
Hampered by slow retail and automotive markets
Labels business could be affected by input cost volatility
The business is split into two segments: packaging distribution and manufacturing. Both grew revenues against a turbulent market backdrop in the company’s first half, with distribution by far the most significant operation, accounting for 84 per cent of interim sales. It does manufacture labels and therefore retains some exposure to paper price volatility, but this vulnerability is still much lower than the likes of Mondi (MNDI) and DS Smith (SMDS), which have both been knocked by falling prices. Meanwhile, a focus on input costs has also helped Macfarlane.
However, a weak retail environment which accounts for around 7 to 8 per cent of Macfarlane’s distribution income, has hurt the company. But retail also offers the group a long-term opportunity. The rise of online shopping and consequent increase in demand for protective packaging is a major plus for Macfarlane. European business-to-consumer e-commerce is forecast to grow at around 13 per cent in 2019 to hit €621bn (£545bn), according to Ecommerce Europe. Macfarlane says it is prioritising e-commerce in the retail space among its growth markets in its second half, to which period sales are traditionally weighted in the run-up to the busy Christmas period. Macfarlane is also investing in better online access to its products for its customers and, more broadly, is accelerating a customer initiative in Europe after a strong early start.
Industrial sales have also shown good growth in some areas, and overall the group has offset the challenges of an ailing retail market, along with sluggish automotive activity. Impressive, too, is Macfarlane’s approach to winning share from competitors. The group competes successfully in a fragmented market against competitors of all sizes, leveraging a focus on customer service and product depth to beat local distributors, while using its presence and infrastructure to take on national rivals. An increased focus on sustainability is more than a mere marketing ploy, too. Macfarlane can leverage its scale to invest in sustainable packaging and attract business from customers that have come under increased pressure to source from sustainable suppliers.
| Macfarlane (MACF) | |||||
| ORD PRICE: | 94.0p | MARKET VALUE: | £148m | ||
| TOUCH: | 94.0-94.2p | 12-MONTH HIGH: | 110p | LOW: | 68.0p |
| FORWARD DIVIDEND YIELD: | 2.8% | FORWARD PE RATIO: | 14 | ||
| NET ASSET VALUE: | 39.6p* | NET DEBT: | 24% | ||
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) | |
| 2016 | 180 | 7.8 | 4.5 | 1.95 | |
| 2017 | 196 | 9.3 | 5.0 | 2.10 | |
| 2018 | 217 | 11.2 | 5.7 | 2.30 | |
| 2019** | 228 | 12.3 | 6.3 | 2.45 | |
| 2020** | 234 | 12.8 | 6.5 | 2.65 | |
| % change | +3 | +4 | +3 | +8 | |
| Normal market size: | 5,000 | ||||
| Beta: | 1.69 | ||||
| *Includes intangible assets of £61m, or 38.6p a share | |||||
| **Arden Partners forecasts | |||||
