Morgan's plan comes together

Morgan Advanced Materials is a manufacturer of specialist materials for a range of niche markets, using carbon, advanced ceramics and composites. It has two divisions. Its carbon and ceramics arm offers products that can improve efficiency in areas as diverse as microprocessors, medical devices, public transport, domestic appliances and power generation. In the first nine months of 2019, this division grew sales by 3.5 per cent. But, in percentage terms, sales at Morgan’s thermal products division were down by the same amount. This division makes products for insulation in high-temperature environments to improve energy usage in manufacturing industries such as solar panels and aluminium. It also sells products for metal melting, such as crucibles. This division has especially felt the drag of a sluggish European market.

While the global economy has recently shown some green shoots, calling a turning point for the weak industrial environment is still a tough call. More faith can be put in the track record established by Morgan since new management took over in 2016, which followed years of faltering progress on margins and disappointing restructuring. Chief executive Pete Raby has busied himself with reining in the group’s pension obligations, making cost savings, disposing of two businesses and shutting down Morgan’s defence outfit. An operational efficiencies programme includes greater use of automation, a reduction in scrap rates and improved raw material costs in the procurement process. Management also limits the use of distributors, with its sales teams operating in close proximity to end customers.

The savings being made are helping to fund increases in research and development expenditure. Products can quickly become outdated, so Morgan’s newer products command higher price tags. This means recent spending increases should bode well for margins. Capital expenditure rose from £33.7m to £53.1m in 2018 and in the first half of 2019 was up from £23.1m to £29.1m. Morgan maintains a dominant position in many of its markets, which owing to their small size are often uneconomic for prospective competitors to enter. Now the business has been stabilised, these factors are expected to lead to a strong uptick in margins in coming years (see chart below).

While debt has been rising, excluding lease liabilities net borrowings represent 1.2 times cash profits. This should leave room for acquisitions, even taking into account the company’s £190m pension deficit. Importantly, an acquisition could help cement the idea that Morgan Advanced has come to the end of the initial restructuring phase of its strategy.

While debt has been rising, excluding lease liabilities net borrowings represent 1.2 times cash profits. This should leave room for acquisitions, even taking into account the company's £190m pension deficit. Importantly, an acquisition could help cement the idea that Morgan Advanced has come to the end of the initial phase of restructuring.