Accrol Group Holdings plc (LON:ACRL) has provided a trading update confirming it is trading broadly in line with expectations. We update our forecasts to reflect a more conservative view of full year profits. While revenue trends are robust, we are reducing our 2018-20 EPS forecasts by 2.2% – 5.9%. Also contained within the statement is the announcement of a new CEO from DS Smith, which we believe is good news given his track record running a major division within a FTSE 100 business. Although trading conditions are not easy, we continue to believe Accrol remains attractive, trading on a discount to small cap peers, despite a ROCE approaching 16% and FCF yield of 4.5%.
Trading update: The company has provided a trading update confirming it is trading at the lower end of the consensus range. We believe revenue growth is on track, with gross profit margins facing continued pressure. While the group remains well hedged on FX, paper prices continue to rise, increasing input costs, and customers remain focused on product re-engineering, which is ultimately putting pressure on the group’s gross margin. The company are due to report results for the interim period ending October 2017 in January 2018.
New CEO: We see this as good news given Gareth Jenkin’s track record at DS Smith PLC where he was Managing Director of the UK Packaging Division. During his time at DS Smith he held 10 different positions and therefore has extensive strategic, operational and M&A experience, gained over his 24-year career at the company. Before taking on the role of Managing Director of UK packaging he was sector director for retail corrugated, covering 8 operating units in the UK.
Forecasts: We are reducing our 2018E – 2020E EPS forecasts by 2.2%- 5.9%. The downgrade is primarily driven by more prudent gross margin assumptions. The challenging trading conditions which led us to downgrade forecasts in July (by 4.5% and 6.0% in 2018E and 2019E respectively) have persisted, leading us to take a more prudent view of gross profit margins through the forecast period. Price inflation is proving to be a slow process across the sector. While prices for some products are starting to increase (e.g. 4-pack of Andrex) prices for key volume products (e.g. 9-packs of Andrex) have remained stagnant for an extended period of time. While price increases are not fundamental to our original investment thesis, the more challenging trading environment post Brexit has made passing increased costs on to customers more difficult.
Investment view: On revised forecasts the shares are currently trading on a 2018E P/E of 11.4x and an EV/EBITDA of 8.7x, which we believe remains attractive for a business with a rising post tax ROCE approaching 16%. 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.
