UK Edition
Questor: Essentra is no essential for your portfolio – recent falls haven’t made the stock cheap
Long-suffering shareholders in Essentra have the chance to make a quick getaway this Thursday. Anyone who shows up to the Hilton London Paddington to hear what the board of the struggling FTSE 250 packaging company has to say can at least leap with ease on a fast train going west after the annual meeting.
That would make a change from the direction of the share price, which has spent the past 12 months resolutely heading south.
Essentra requires some introduction. At first glance, it is another of those companies with a meaningless name trying to create some order from a disparate set of assets. In fact, it was once part of Bunzl – distributor of everything from paper napkins to rubber gloves – until it was demerged in 2005, and used to go by the name of Filtrona until the branding experts were let loose.
It was presided over by Colin Day, once Bart Becht’s chief beancounter at Reckitt Benckiser, until his departure following a series of profit warnings. His replacement, Paul Forman, is unlikely to be on Day’s Christmas card list after describing most of Essentra’s ailments as self-inflicted, promising to focus on its three largest divisions, boost investment, control cash flows and win back lost credibility with customers.
Forman was brought in from Coats, the threads group that he led for almost seven years.
While various pension liabilities were settled, the performance of Coats – whose shares are 7pc higher since being tipped in this column last June – was sharpened up and benefited from some savvy bolt-on acquisitions.
The Essentra chief clearly thinks he can repeat the trick, putting his money where his mouth is this month by splashing out £86,000 on shares, while the rest of his top team were loaded up with options. They will be hoping the stock regains some bounce.
Since Forman took the helm in early 2017, Essentra shares have risen by as much as a quarter but are now trading at less than when he arrived, giving the business a £1.1bn market value. There are some old hands on the board including Terry Twigger, the former Meggitt aerospace boss. The turnaround is being closely monitored by chairman Paul Lester, a veteran of VT Group and Balfour Beatty.
Essentra has three divisions, and trading across them is mixed. Components, which makes low-cost plastic and metal items including plugs, fasteners and flange protectors for the construction, manufacturing and electronics industries, was the only division to grow last year, at 8pc.
The star performer was the pipe protection technologies unit, which serves the oil and gas industry and is benefiting from a rising rig count in America. Company watchers at Peel Hunt, the broker, are upbeat about the division’s prospects given stronger global growth, even though margins have narrowed slightly because of increased investment.
Cigarette filters declined by 3pc as Essentra passed through raw materials savings to customers. The tobacco-loving Chinese market is recovering and Essentra is trying to make progress in speciality markets including “heat-not-burn” technology.
The problem child is the health and personal care unit, which makes cartons and tamper proofing. Sales fell by 8pc last year and profits dropped by 80pc to £7.2m. It is suffering from inherited poor integration planning and weak customer service. A gift boxes factory in Newport lost £4.5m last year and has been closed.
The hurricanes that last autumn struck Puerto Rico and the US – where Essentra has plants – will damage profits by up to £2m, net of any insurance recovery, and further soured the mood. However, trading is forecast to turn positive again in the second half of this year after deals were signed with some global healthcare providers.
At the time of annual results in early March, analysts at Deutsche, Essentra’s joint broker, said they expected low single-digit cuts to consensus earnings forecasts because of a foreign exchange drag, but raised hopes of recovery. The shares yield about 5pc and look attractive, but the dividend is unlikely to grow this year or next as Forman works through the group’s problems.
It is one to watch but because the shares are trading at 16 times this year’s forecast earnings, Essentra is still not cheap despite recent declines.
Questor says: hold
Ticker: ESNT
Share price at close: 421.2p
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