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“even if the firm only manages to secure a fraction of the global market there looks to be an interesting opportunity here.” Overall profit before tax was reduced to £1.3 million after a £0.8 million pension adjustment. Net debt increased from £9.3 million to £10.3 million after considerable investment and capex. At the divisional level, the newly formed James Cropper Paper Products (JCPP) segment delivered a c.20% increase in EBIT. JCPP is the amalgamation of the James Cropper Speciality Papers and James Cropper Converting which the group previously reported on separately. Meanwhile, Technical Fibre Products (TFP) saw a 12% reduction in EBIT in FY14 which was largely due to the timing of the start of some contracts and extra investment in its US facility in anticipation of these.
Valuation Clearly, the full year numbers mentioned above demonstrate the volatility of Cropper’s business. While the investment in the recycling plant will reduce the firm’s exposure to pulp prices in the long run, for the time being it retains that exposure; what’s more, it is also exposed to gas prices. The rule of thumb for Cropper’s profits is that a £10 per tonne upward (downward) movement in pulp prices will increase (reduce) the group’s annual profits by £400,000. The rule of thumb with gas prices is that a 10p per therm upward (downward) movement has a negative (positive) impact on annual profits of £720,000.
The pension deficit of £9.3 million is also a concern, although the imminent increase in interest rates should lend a hand in this regard. Following the FY14 results, house broker Westhouse (the only broker covering Cropper at present) reduced its adjusted pre-tax profit forecast for FY15 to £3.8 million (from £4.4 million) to reflect currency movements, but kept its FY16 forecast at £4.9 million. The broker said it believes the group is currently entering “a substantial profit growth phase” and is encouraged by the CEO’s efforts to overhaul the management team in the last 12 months. It upgraded its stance to ‘buy’ from ‘add’ and increased its price target from 450p to 500p on the back of the results. On Westhouse’s earnings forecasts, the rating is c.11.8 times, falling to just 9.1 times for FY16. Without the opportunity in paper cup recycling I’d say that the rating looked pretty full. But even if the firm only manages to secure a fraction of the global market there looks to be an interesting opportunity here. What’s more, there’s also a reasonable (c.2.2% prospective) dividend yield on offer. Should the foretold upturn in profitability come to pass, the metrics look good, with the PEG at 0.4 for FY15 and 0.3 for FY16.
66 | www.financial-spread-betting.com | August 2014