Accrol Group Holdings PLC (LON:ACRL) has delivered solid results this morning with EPS +7.8% ahead of our forecast and up an impressive 65.2% YOY. Short term trading conditions have been difficult post Brexit, with delays to price increases and some inflationary pressures holding back the full year performance. We are reducing our 2018 and 2019 forecasts by 4.5% and 6.0% respectively at the adjusted EPS level, reflecting these conditions coupled with additional investment to secure future growth. We continue to believe the valuation remains attractive given its growth potential and unique market positioning and believe the risk/reward profile remains positive from here.
2017 results: Revenue was up 14.2% YOY to £135.1m and was 2% below our forecast. Pricing of parent reels fell over the period, which helped underlying gross margins, however this was more than offset by increased costs associated with the growth of the production headcount meaning gross margins fell 127 bps YOY to 27.9%. Adjusted EBITDA advanced from £15.0m to £16.1m with margins down YOY from 11.1% to 10.5%. Adjusted PBT (pre-amortisation, exceptional, pre-IPO interest costs and gains on financial instruments) was £13.5m (£13.0m assuming full interest costs) vs. £8.2m owing to lower finance costs (£0.6m vs. £4.9m) reflecting the new financial structure post IPO with net debt down £41.7m to £19.0m at the year end. EPS of 12.4p is 7.8% ahead of forecasts (due to lower tax) and up an impressive 65.2% year on year.
Key themes: We believe Accrol has transitioned well to life as an AIM listed company and has achieved a lot in the last 12 months. Market conditions have got tougher post Brexit, with price inflation from the major multiples in key brands moving more slowly than anticipated as promotional activity remains high. Accrol continues to be well hedged through to 2018, and the significant investments made in Leyland and Skelmersdale continues to go to plan.
Forecasts: We are reducing our 2018E and 2019E EPS forecasts by 4.5% and 6.0%. The 2018E earnings downgrade is the result of more prudent gross margin assumptions (-30bps from our previous forecast) given current trading conditions driven by US$ appreciation and slower than expected rate of inflation from major brands. The 2019E downgrade is primarily driven by cost investment, which we believe should secure its attractive market position within the discounting segment as well as further penetration with the multiples.
Investment view: The shares are currently trading on a 2018E P/E of 11.9x and an EV/EBITDA of 8.9x, which we believe remains attractive for a business with a rising post tax ROCE >15%. Given the continued investment in growth and capacity, we remain comfortable with our original thesis that this should be a £30m+ EBITDA business based on 200,000 tonnage capacity.
