On the surface, materials business Zotefoams (ZTF) appears to have a lot going for it. The company has advanced technology and manufactures high-performance foams for customers from diverse sectors. It also boasts an exclusive tie-up with footwear giant Nike, which is driving rapid growth at its HPP division. However, the heavy investment needed to expand the business means free cash flow has been negative in each of the past five years while the group’s largest market has gone into decline just as it completes key capital projects. All this leaves us concerned about the shares’ prospects.
High growth HPP business
Historic sales growth
Profit warning
High working capital requirements
Under-utilised new capacity
Five years of free cash outflows