This article presents an investment case for the UK quoted company British Polythene Industries plc, which produces, markets and sells polythene packaging products.
British Polythene Industries plc (“BPI”) was founded in 1910. BPI is a packaging manufacturer. The Company and its subsidiaries produce, market and sell polythene packaging products. Its headquarters are in Greenock in Scotland. The company employs about 2500 people and has manufacturing sites in the UK, Europe, China and North America. BPI merchandises its products to the retail and industrial sectors throughout the United Kingdom and Europe. BPI operates in all private and public sector markets, supplying a wide range of packaging films and bags on a global scale.
BPI is one of the leading manufacturers of polythene products in Europe. They supply over 300,000 tonnes each year for a wide variety of everyday applications and use recycling plants to reprocess over 64,000 tonnes of UK waste from industrial, commercial, agricultural and domestic sources.
BPI has a number of well known and established brand names including Supreme (stretch-wrap), Visqueen (construction films), The Green Sack (recycled refuse sacks) and Silotite (silage stretch film),
The company seems to be well-managed and the management are excellent communicators in all their dealings with shareholders. The company consistently ranks as being one of the most admired businesses operating in the UK.
The Directors have a decent interest in their company, representing 4.0% of the issue share capital. The directors have been buyers of the shares in the 365 days to 29th October 2010. Most recently CEO John T Langlands bought £46000 worth of shares at £2.30 on 14th May 2010 and Chairman Cameron McLatchie bought £230000 worth of shares, also at £2.30 on 14th May 2010.
British Polythene Industries PLC (“BPI”) issued its Interim results for the 6 months ended 30th June 2010 on 31st August 2010. .
The headline numbers were positive. Revenue rose 12.7% to £260.8m, due to price rises and increased volumes. Profits before tax increased 40% to £13.1m, but this result was flattered by a credit for a property gain. Underlying operating profits fell 10% to £12.2m, which was satisfactory was much higher input costs were passed on to customers. The diluted EPS before restructuring fell 3% to 27p and the interim dividend was lifted by 4% to 3.65p.
Looking at the balance sheet, net borrowings fell from £55.1m at 30th June 2009 to £49.5m for June 2010. This helped the interest charge in the P&L fall from £1.8m to £1m. The Stockton site was sold and realised £6.0m, being a gain of £3.5m. Costs of £0.7m were incurred relating to the closure of the Brampton site. Two properties are currently for sale – Brampton and Essex. Both are expected to be sold within the next year, with proceeds expected to be £2.5 m.
There has been an increase in the liability on the Group Pension scheme, with the net deficit rising from £58m to £70m in the 6 months ended 30th June 2010. £9m of this change related to a fall in the fait value of the scheme’s assets. BPI reported that losses in the equity portfolio were largely to blame. Action has been taken to close the scheme to any future service accrual after September 2010.
With two months already under their belts, management are expecting to see healthy volumes continuing for H2 2010. The end result will depend on the price for polymers and that BPI is not squeezed further by these rising input costs and that the company can benefit further from the measures taken to make operational improvements. BPI’s trading statement on 29th June had also not only included their worries on polymer pricing, but also their concerns on the poor early summer demand for silage stretch-wrap due to abnormal growing conditions.
BPI note that rises in raw material costs continue to bother buyers in Western Europe. Prices increased continuously in H1 2010, although prices fell in America and Asia. An anomaly has arisen, whereby raw material costs were some $300 per tonne lower in China than in Western Europe, despite coming from the same European factories. BPI are advocating a long overdue review of import tariffs for polymer imports into the EC. We assume that German exporters are the major beneficiaries of these price increases and that this has also made a significant contribution to the strong performance of German exports during H1 2010. However, given German political weight within the EU, we doubt that the authorities will move anytime soon to investigate price fixing at the company level or protectionism on the global plain. BPI state that prices have eased somewhat in August but some producers have started seeking increases again in September.
In view of the rising polymer prices and the fact that BPI themselves were visited by officials from the European Commission and the Office of Fair Trading in May 2010, as they investigate the agricultural films market, we feel that the European political environment is hostile towards producers like BPI. Meanwhile the authorities are they turning a blind eye to the massive price increases by European polymer producers who are protected by high import tariffs. This comes at a time when BPI are experiencing competitive pressures in almost every market they are in, input costs are rising and weather patterns are abnormal.The cost reduction program continues at BPI, with closure of Stockton, the transfer of equipment to Greenock and Ardeer, and the closure of the Brampton site in April 2010.
Good news is returning in sales to the construction sector with BPI reporting improvement in H1 2010. This would agree with recent UK GDP data showing a stronger rise than expected in GDP growth for Q2 2010, with construction showing growth of over 8%.
Looking at the cashflow we were disturbed by one item. This was the rather large £35m increase in trade and other receivables. This compares with an increase of only £19m in H1 2009. And an absolute number of only £83m receivable at 30th June 2010. The equivalent balance sheet number at 30th June 2009 was £78m, which is some comfort, but we just hope that this big swing is not hiding a problem with the recovery of debts.
WHAT IS THE BUSINESS WORTH?
We have used a discounted earnings model to value BPI plc. We note that Morningstar’s broker consensus numbers of for the years ending 31st December 2010 have been raised over the month, by +0.32p to 40.37p, and up +1.07p over the last three months. As for the 2011 forecasted earnings the consensus EPS numbers have been revised up by +0.09p over 1 month and up by +1.23p over the last 3 months to stand at 43.03p. We have used these broker estimates as part of our discounted earnings valuation model. For 2010 and 2011 we are assuming turnover of £456m and £470m and operating profits of £18.3m and £19.4m. The operating margins of 4.01% and 4.12% are above the margins of 3.74 for the full year ended 31st December 2009. The dividends are expected to be 11.35p and 11.92p respectively giving a dividend yield 4.65% and 4.89%.
From 2012 onwards we used our own numbers. These were based on the conservative assumption that earnings per share will remain flat. We consider this zero growth rate to reasonable in view of the uncertainty surrounding the current EU enquiry, the pension funding and the fears of a further economic downswing. However, the underlying growth rate achieved over the first 6 months of 2010 and the confidence of management reflected in the raising of the interim dividend, lead us to believe that the surprise may be on the upside. We value the company at 379p, which represents a potential upside of 55% to the current share price of 244p. Brokers Investec reiterated their BUY recommendation with a price target (PT) of 400p on 31st August 2010, which is not too far from our own valuation.
We think that buying BPI mean acquiring a well established old brand name in polythene packaging products business and one of Europe’s leading recyclers. The management give regular detailed trading updates and have consolidated and invested in manufacturing capacity to cement market leadership. This has resulted in a meaner and leaner BPI which should be in a good position when volume growth returns. For the moment BPI’s share price movement has been inversely related to the polymer price movements, which are not subject to sufficient scrutiny by the EU authorities, whereas the price-takers like BPI are being squeezed while their sales prices remain under the watchful eyes of the EU.
The stock is fundamentally cheap, being on a price earnings ratio of just 6 times current year earnings. BPI pays a nice 4.7% dividend yield and unexpectedly increased its interim dividend by 4% to 3.65p, which the chairman called a sign of confidence in BPI’s future.
BPI’s products are mainly supplied to the UK food retail, food service and food manufacturing sectors. The company’s shares are listed on the London Stock Exchange and can be found under the Bloomberg ticker BPI:LN