Accrol Group Holdings (LON: ACRL) has announced a reassuring pre-close trading update, which confirms it should hit our (Zeus Capital) forecasts at the adjusted EBITDA level, with net debt also likely to be below our forecasts. We are maintaining our 2020E and 2021E forecasts for now, but believe the Group is through the worst and is on track to delivering a well-executed recovery. It should still be noted that this remains one of the most challenging business turnarounds we have seen, and challenges remain from here.
Trading update: Accrol has announced a trading update ahead of its results for the full year to 30 April 2019. The Group is trading in line (subject to final audit) at the adjusted EBITDA level, and is expected to achieve £1.0m, which is in line with our forecast and represents a £7.0m positive swing vs. the prior year. This is testament to a strong Q4 performance reflecting the achievement of its strategic turnaround objectives, while also maintaining “acceptable levels of monthly profitability.” Final results will be announced on 3 September.
Key drivers: Total revenue in 2019E is expected to be at c£119m, which is likely to be lower vs. our £126.0m forecast, albeit most of this would be down to a faster exit of lower margin contract than anticipated. Underlying sales in the core toilet roll product increased by c12% to £85m, which we view as an encouraging sign for future organic growth. The adjusted EBITDA performance is expected to be bang in line with our forecast and is encouraging in the context of progress made vs. last year (a loss of £5.8m) as well as the c£10m cost headwind of FX and material cost inflation during the period. That said, adjusted PBT loss is expected to be in the range of £2.5m – £3.0m in 2019E, which is higher than our £2.3m forecast. Encouragingly, net debt is expected to be c£27m, which compares to our forecast of £29.6m despite the increase in capital expenditure, and we assume this is down to better than expected working capital management. Exceptional costs are expected to be in the range of £7.5-8.0m, which is slightly higher vs. our £7.0m forecast.
Forecasts: We are going to maintain our 2020E and 2021E forecasts at this juncture and await further information from the 2019E outturn. However, we believe the progress made in hitting our adjusted EBITDA forecast coupled with lower net debt is encouraging, albeit further momentum in its strategic recovery is clearly required to hit our 2020E forecast and beyond, and will continue to be contingent on the FX and material cost environment.
Investment view: We believe this update points to further evidence that the structural cost savings made are starting to bear fruit in this business, with major restructuring initiatives now behind them. While challenges remain, we see potential for the Group to return to its foundation to build a more efficient and stronger business from here..
