Questor: in a nation of hygiene addicts McBride should be cleaning up – buy before it bounces

Someone is cleaning up because of coronavirus. The FTSE 100 stands 22pc higher than it did at its recent nadir on March 23, the day the lockdown began. Bargain hunters who piled into airline, retail and technology stocks hoping for a swift rebound have not been disappointed, although any second wave of the virus might pare those gains.

The slide was less pronounced for those sectors that are unavoidably benefiting from this pandemic, but the appreciation has been very similar. That is why AstraZeneca, the pharmaceuticals giant, has become the largest stock listed in London and Reckitt Benckiser shares are touching levels not seen since 2017.

Coronavirus has been disinfectant for Reckitt’s corporate ills. Not so long ago, the Durex and Dettol maker was a lumbering monolith hunting for growth. Consumers’ transition from panic buying to a new focus on hygiene has changed the game, but not just for Reckitt.

McBride is a fraction of the size but benefits from the same shopping trends and so far without the same reaction from its share price.

Investors may be right to be cautious. McBride, which makes own-brand surface cleaners, bleach and soap powder under contract from supermarkets, has had a rotten time.

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January saw its third profit warning in a year when Ludwig de Mot, the newly arrived chief executive, warned that underlying earnings would come in 15pc lower than the market had been expecting.

McBride, which had struggled to pass on the rising cost of raw materials to customers, has also been squeezed as big brands boost their marketing efforts. The UK division, which accounts for about a quarter of its business, saw an 8pc fall in sales in the first six months of the financial year, which ends in June.

The story was brighter in March, when McBride disclosed surging demand, and again in mid-May, when it reported that earnings this year would be around 15pc ahead of lowered expectations. Its year-end debt level, which company followers at Jefferies, the bank, had pencilled in at £118m, should also come in below forecasts. The interim dividend was cancelled for expediency.

It seems clear that the cleaning bug will benefit McBride going into its 2021 financial year, but there is little upside to be found in the forecast numbers. Investors are waiting to see what Mr De Mot, who ran ArcelorMittal’s Canadian mining outpost, might do with the business before formulating an opinion.

McBride has been trying to clean up its act, with mixed results, selling off most of its personal care division – mouthwash, shampoo, skincare – over time but holding on, for now, to a small aerosols business that is doing well thanks to demand for hand sanitiser.

It has also tried to tackle costs, closing factories in Hull and Barrow and shortly opening in Malaysia, with an eye on growing Asian sales. Keen for the business to prosper is Teleios Capital Partners, an activist investor and McBride’s largest shareholder.

Its 23pc stake is less than it was but it is fair to assume it is still sitting on a loss thus far. Swiss-based Teleios is not used to failure, with notable hits including its role in the turnaround of drinks maker SodaStream that resulted in its 2018 sale to PepsiCo.

Also betting on better times for McBride – as he must – is Jeffrey Nodland, the chemicals industry veteran. The chairman since October, he has been stockpiling shares like most people were grabbing loo rolls not long ago, spending the best part of £200,000.

The hope is that better trading will ease the balance sheet, where borrowings currently exceed market value. McBride’s financial covenants state that net debt cannot exceed three times underlying earnings.

Investec, the house broker, suggests the ratio will go no higher than 2.3 times in the next two years. Last year £4.3m, almost a quarter of McBride’s operating cash flow, went on interest payments, not far from the £6m paid in dividends.

With the shares trading on just 7.6 times next year’s forecast earnings, the City is giving no benefit of the doubt to the new management team. McBride’s shares deserve to shine brighter than this. Add them to your basket.

Questor says: buy

Ticker: MCB

Share price at close: 57p

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