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Research: Industrials
Building on an impressive H1 performance, Thrace produced some record quarterly achievements in margins and profitability for both Technical Fabrics and Packaging in Q3. We are again raising our earnings estimates significantly given this strong business momentum. Thrace’s share price has performed well this year but, in the context of current profit levels and based on our DCF, the valuation appears to be far too low.
Written by
Toby Thorrington
Thrace Plastics |
First-half momentum accelerates in Q3 |
Q3 results |
General industrials |
18 December 2020 |
Share price performance
Business description
Next events
Analyst
Thrace Plastics is a research client of Edison Investment Research Limited |
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Building on an impressive H1 performance, Thrace produced some record quarterly achievements in margins and profitability for both Technical Fabrics and Packaging in Q3. We are again raising our earnings estimates significantly given this strong business momentum. Thrace’s share price has performed well this year but, in the context of current profit levels and based on our DCF, the valuation appears to be far too low.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield** |
12/18 |
322.7 |
11.5 |
21.0 |
4.4 |
17.7 |
1.2 |
12/19 |
327.8 |
10.2 |
12.8 |
4.6 |
29.1 |
1.2 |
12/20e |
342.2 |
52.0 |
90.6 |
4.6 |
4.1 |
1.2 |
12/21e |
360.9 |
52.2 |
90.1 |
4.6 |
4.1 |
1.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. Estimates are for continuing operations only. **Before special dividend.
Delivering record profitability in Q3
Favourable mix development, good pricing discipline and control over operating costs all contributed to record profitability for Thrace in Q3. On revenues c 31% higher y-o-y, the company delivered EBITDA of €27.8m in the quarter, which exceeded H120 overall and approached its FY19 full-year equivalent. As previously noted, improved product mix (including higher demand for products related to personal protection and healthcare) and ongoing restructuring/exit from loss making business benefited financial performance, as did lower prevailing input costs. Strong profitability drove a further reduction in core net debt in Q3 (down c €6m from H120 to €34m), even after paying the FY19 dividend and making significant investment in the period.
Performance warrants further estimate uplifts
Our estimates have been proved to be far too reserved so far in 2020 and we were surprised again by the remarkable Q3 financial performance. With favourable outlook comments from the company and good momentum as the year end approaches, we have raised our PBT estimates again, up more than 60% for FY20 with uplifts exceeding 40% in the next two years. Our statutory PBT projections (after c €2m reorganisation costs in FY20) show only modest progress from current year levels at this stage. We feel that gross margin resilience will be a key determinant of profitability in future years and will continue to track this metric closely.
Valuation: Share price rise lags earnings increase
Thrace’s share price has now risen by over 80% ytd, although our FY20 earnings estimates have increased more than threefold over the same time period. Consequently, the current year P/E and EV/EBITDA are still just 4.1x and 2.9x. Our DCF methodology suggests that at this level Thrace’s share price is discounting long-term EBITDA of €27–28m, which is less than 40% of our FY20 forecast. Even allowing for some retracement from record profit levels, such an implied view of future prospects seems far too conservative in our view. The payment of a special dividend (of c 5.7c) was approved on 14 December and further enhances the total return to investors in 2020.
Q3 results overview
Building on our recent H1 results commentary, we only seek to pick out the Q3 highlights in this short note. At group level, Q3 revenue was c 31% above its prior year comparator and, with a strong gross margin performance from both main reporting divisions – even relative to a significantly improved H1 – the flow through to operating profit was very impressive. Specifically, a gross margin of 35.8% was achieved (versus 20.1% in Q319), lifting the FY20 nine-month equivalent to 30.5% (19.8% in FY19). Underlying volumes are understood to have only increased by low single-digit percentage points, so sector mix developments and robust pricing/retention of weaker input price benefits were the main drivers here. Good control of opex line items (which in aggregate were only 2% higher than in Q319) allowed the gross profit uplift to substantially drop through to operating profit, which came in at a quarterly record of €23.1m (an EBIT margin of 23.5%).
Technical Fabrics revenue (before group adjustments) was €70m in Q3; while sales in excess of €60m have been achieved previously (most recently €64m in Q219), the latest quarter was the highest on record, we believe. More significantly, the divisional gross and EBITDA margins (based on the same revenue number) were comfortably ahead of levels seen in the past at 34.7% and 27.0% respectively, and represented further progress on already strong momentum in the first two quarters of the year. (In context, FY19 margins: gross 17.8%, EBITDA 7.3%, partly diluted by now discontinued operations.) Underlying volumes for the continuing operations were understood to be modestly ahead of the prior year and pricing of individual product groups was also no stronger.
As seen at the interim stage, product mix evolution has played an important role, including:
■
a shift towards higher-margin medical fabrics and products for personal protective equipment (PPE), supported by capex to expand capacity which began production during the quarter;
■
increasing proportions of value-added lamination solutions (combining a number of fabrics with different properties) and reduced lower-value/more competitive commodity lines (such as bulk bags); and
■
higher operational gearing effects in non-woven fabrics due to lower labour intensity in production.
Polypropylene feedstock prices declined in Q419 and were broadly stable sequentially in Q120, before experiencing a sharper downward move in Q220 (in the -10–15% range). With a lag it would be normal to expect end-product pricing to reflect input cost changes over time. It does not appear that selling price pressures characterised Q3 trading and, therefore, we believe that the demand developments described above enabled Thrace to widen the division’s pricing spread over input prices during the period. We are unable to quantify the individual contributions of the above features to the overall margin improvement observed in Q3.
The cessation of US non-woven fabric production at Thrace Linq (now treated as a discontinued activity) and relocation of two lines to Europe has been a significant undertaking during 2020. The first line (at Don & Low in Scotland) operated for one month in Q3, while the second (at Xanthi in northern Greece) is scheduled to come online by the end of the year. Hence, neither made a material contribution to Q3, but should be available to produce fabrics for the whole of 2021 and beyond.
Packaging’s €31m Q3 gross revenue was also a record for an individual quarter, we believe, and its margin performance did not disappoint either, coming in at 34.6% at the gross level, 29.9% for EBITDA. (In context, FY19 margins: gross 21.5%, EBITDA 14.0%.)
To some extent, the themes behind Technical Fabrics’ Q3 also played out for Packaging. Specifically, improved sector mix (including more value-added food packaging and reduced demand for commoditised hospitality/catering lines), which improves average selling prices, all other things being equal. Robust pricing in individual product categories also allowed Thrace to capture the full benefit of this mix development. This division has also been expanding in recent years supported by incremental capex in higher value-added lines and this has clearly benefited performance in FY20.
Further cash inflow in Q3: At the end of September, core net debt (excluding IFRS 16 lease liabilities of c €6m) had reduced to c €34m, representing a further €6m improvement from the half-year stage, which itself was sharply lower than the c €74m at the beginning of the year. Operating cash flow for the quarter was slightly ahead of group EBIT for the period, signifying good cash conversion. At this level, Thrace was able to more than fund almost €11m capex payments during Q3 (and now at c €23m for the year to date) boosted by capacity expansion for PPE materials/ finished products and the FY19 dividend payment of c €2m as well as expected interest, tax and IFRS 16 lease-related outflows. With the two relocated Thrace Linq lines becoming available for production, we are not currently aware of any capacity constraints within Technical Fabrics. In Packaging, injection moulding/rigid product lines can be added in smaller incremental stages and this is typically done to service new business won.
Distribution of capital: At an EGM on 14 December (called on 23 November), shareholders voted in favour of a special dividend distribution of €2.5m, which is to be paid in FY20. Thrace has had a very strong FY20 trading period and its balance sheet is conservatively financed in the context of this level of profitability. Hence, this scale of special distribution – which is in addition to the normal group dividend of €2m seen in the past two years – can be easily absorbed. On our estimates, the FY20e year-end core bank net debt:EBITDA is c 0.5x flowing through to a very modestly geared balance sheet by the end of FY21.
Further significant upgrades based on Q3 momentum
In the Q3 results announcement, management stated that it expected Q4 to show significant improvement versus the prior year in terms of profit and liquidity.1 While Q419 was not especially strong (with some seasonality in Packaging and subsector softness in Technical Fabrics and restructuring actions), excellent margin momentum in Q320 suggests that the y-o-y improvement in Q4 could again be material. Having only recently upgraded our forecasts across all three estimate years, reflecting the Q3/nine-month report, we are now making further significant upgrades. Current levels of trading in Technical Fabrics are to be supplemented by the relocated US lines in 2021, for which the commissioning phases have been successfully completed. Sustaining the exceptional margin performance seen so far in FY20 will be a key driver of future earnings. Compared to our previous estimates, our FY20 revenues are c 9% higher than before (with more modest uplifts in the next two years) and our gross margin expectations are c 300bp higher in all years. We have allowed some reduction in gross margins beyond FY20, although they are still well above historic norms. In underlying terms, there is a degree of volume recovery in Technical Fabrics in our FY21 estimates as the former US lines come back on stream in their new European locations, but otherwise we have assumed volume progression at low single-digit percentage levels.
Interim Financial Information for the nine months to end September; 3.25 Significant Events, section III, p45.
Exhibit 1: Thrace Group – Edison estimates
EPS (c) |
PBT (€m) |
EBITDA* (€m) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2020e |
57.6 |
90.6 |
+57.3% |
33.2 |
52.0 |
+56.7% |
53.5 |
72.6 |
+35.8% |
2021e |
59.3 |
90.1 |
+51.8% |
34.5 |
52.2 |
+51.2% |
55.9 |
73.2 |
+31.1% |
2022e |
62.6 |
90.5 |
+44.6% |
36.4 |
52.5 |
+44.2% |
57.1 |
73.0 |
+27.8% |
Source: Edison Investment Research. Note: Continuing operations. *IFRS 16 basis.
Exhibit 2: Financial summary
€m |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
251.2 |
278.2 |
289.4 |
291.9 |
318.5 |
322.7 |
327.8 |
342.2 |
360.9 |
370.7 |
Cost of Sales |
|
|
(207.2) |
(226.9) |
(230.0) |
(225.5) |
(251.6) |
(259.5) |
(264.2) |
(239.3) |
(256.6) |
(265.6) |
Gross Profit |
|
|
44.0 |
51.3 |
59.4 |
66.4 |
66.9 |
63.2 |
63.5 |
102.9 |
104.2 |
105.1 |
EBITDA |
|
|
17.7 |
23.5 |
29.0 |
35.2 |
30.1 |
29.0 |
30.6 |
72.6 |
73.2 |
73.0 |
Operating Profit (before GW and except.) |
8.8 |
14.7 |
19.1 |
22.9 |
17.2 |
15.2 |
14.0 |
54.3 |
53.9 |
53.7 |
||
Intangible Amortisation |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Exceptionals |
|
|
0 |
0 |
0 |
0 |
0 |
(1) |
(2) |
(2) |
0 |
0 |
Other |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Operating Profit |
|
|
8.8 |
14.7 |
19.1 |
22.9 |
17.2 |
13.7 |
12.1 |
52.1 |
53.9 |
53.7 |
Net Interest |
|
|
(4.3) |
(5.2) |
(6.5) |
(5.2) |
(4.5) |
(3.8) |
(4.2) |
(3.4) |
(3.0) |
(2.5) |
Pension Net Finance Cost |
|
|
(0.6) |
(0.6) |
(0.9) |
(0.6) |
(0.9) |
(0.7) |
(0.7) |
(0.7) |
(0.7) |
(0.7) |
Other / Associates |
|
|
2.1 |
1.2 |
1.5 |
1.3 |
2.1 |
0.9 |
1.2 |
1.8 |
2.0 |
2.0 |
Profit Before Tax (norm) |
|
|
6.0 |
10.1 |
13.3 |
18.3 |
13.8 |
11.5 |
10.2 |
52.0 |
52.2 |
52.5 |
Profit Before Tax (IFRS) |
|
|
6.0 |
10.1 |
13.3 |
18.3 |
13.8 |
10.0 |
8.3 |
49.8 |
52.2 |
52.5 |
Tax |
|
|
(3) |
(3) |
(3) |
(5) |
(3) |
(2) |
(4) |
(12) |
(13) |
(13) |
Profit After Tax (norm) |
|
|
3 |
7 |
10 |
14 |
11 |
9 |
6 |
40 |
40 |
40 |
Profit After Tax (IFRS) |
|
|
3 |
7 |
10 |
14 |
11 |
8 |
4 |
38 |
40 |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
45.0 |
45.0 |
44.4 |
44.0 |
43.7 |
43.7 |
43.7 |
43.7 |
43.7 |
43.7 |
|
EPS - normalised (c) |
|
|
5.5 |
14.4 |
22.0 |
30.4 |
24.1 |
21.0 |
12.8 |
90.6 |
90.1 |
90.5 |
EPS - IFRS (c) |
|
|
5.5 |
14.4 |
22.0 |
30.4 |
24.1 |
17.7 |
8.5 |
85.6 |
90.1 |
90.5 |
Dividend per share (c) |
|
|
7.5 |
2.0 |
0.0 |
0.0 |
4.7 |
4.4 |
4.6 |
4.6 |
4.6 |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
17.5 |
18.4 |
20.5 |
22.7 |
21.0 |
19.6 |
19.4 |
30.1 |
28.9 |
28.4 |
EBITDA Margin (%) |
|
|
7.1 |
8.5 |
10.0 |
12.0 |
9.5 |
9.0 |
9.3 |
21.2 |
20.3 |
19.7 |
Operating Margin (before GW and except.) (%) |
3.5 |
5.3 |
6.6 |
7.8 |
5.4 |
4.7 |
4.3 |
15.9 |
15.0 |
14.5 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
87.4 |
100.6 |
122.7 |
140.5 |
147.8 |
167.0 |
170.1 |
174.7 |
179.0 |
183.2 |
Intangible Assets |
|
|
10.7 |
10.8 |
11.5 |
11.6 |
11.4 |
11.6 |
11.4 |
10.5 |
10.2 |
9.8 |
Tangible Assets |
|
|
68.8 |
74.7 |
92.3 |
107.4 |
114.4 |
136.0 |
138.2 |
143.1 |
146.4 |
149.7 |
Investments |
|
|
7.9 |
15.1 |
18.9 |
21.5 |
22.0 |
19.5 |
20.6 |
21.1 |
22.4 |
23.7 |
Current Assets |
|
|
159.2 |
146.4 |
141.9 |
149.0 |
156.9 |
153.2 |
153.2 |
167.0 |
173.6 |
208.3 |
Stocks |
|
|
53.4 |
48.9 |
53.0 |
57.7 |
59.6 |
66.9 |
59.2 |
53.6 |
57.4 |
59.5 |
Debtors |
|
|
48.1 |
53.0 |
52.6 |
50.6 |
57.3 |
53.6 |
57.4 |
64.0 |
67.4 |
69.3 |
Cash |
|
|
41.6 |
32.9 |
26.4 |
31.1 |
30.6 |
22.8 |
22.1 |
35.3 |
34.6 |
65.3 |
Current Liabilities |
|
|
(108.0) |
(102.9) |
(109.2) |
(118.0) |
(130.5) |
(131.7) |
(101.8) |
(101.8) |
(76.6) |
(79.3) |
Creditors |
|
|
(45.5) |
(46.7) |
(50.2) |
(50.9) |
(57.9) |
(59.7) |
(58.3) |
(76.7) |
(76.6) |
(79.3) |
Short term borrowings |
|
|
(62.5) |
(56.2) |
(59.0) |
(67.1) |
(72.7) |
(72.1) |
(43.5) |
(25.1) |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(24.8) |
(31.5) |
(26.1) |
(48.7) |
(36.7) |
(46.9) |
(75.2) |
(68.0) |
(67.0) |
(66.0) |
Long term borrowings |
|
|
(10.6) |
(9.5) |
(9.8) |
(18.7) |
(15.7) |
(29.1) |
(52.9) |
(45.5) |
(45.5) |
(45.5) |
Other long term liabilities |
|
|
(14.3) |
(22.1) |
(16.3) |
(30.0) |
(21.0) |
(17.7) |
(22.3) |
(22.5) |
(21.5) |
(20.5) |
Net Assets |
|
|
113.7 |
112.5 |
129.2 |
122.8 |
137.5 |
141.6 |
146.3 |
171.9 |
208.9 |
246.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
17.4 |
19.8 |
28.3 |
29.2 |
28.2 |
23.2 |
26.5 |
78.6 |
63.5 |
69.5 |
Net Interest |
|
|
(4.8) |
(4.5) |
(4.0) |
(5.3) |
(4.6) |
(4.7) |
(4.2) |
(3.6) |
(3.0) |
(2.5) |
Minority Dividends |
|
|
0.0 |
0.5 |
0.4 |
0.5 |
0.3 |
0.5 |
0.7 |
0.7 |
0.7 |
0.7 |
Tax |
|
|
(2.3) |
(2.7) |
(4.8) |
(4.7) |
(4.3) |
(4.3) |
(2.6) |
(12.1) |
(12.5) |
(12.6) |
Capex |
|
|
(6.3) |
(11.7) |
(25.1) |
(17.7) |
(21.4) |
(32.1) |
(21.0) |
(15.8) |
(17.5) |
(17.5) |
Acquisitions/disposals |
|
|
0.5 |
1.1 |
(0.1) |
(0.3) |
(1.7) |
(0.0) |
(0.8) |
0.0 |
0.0 |
0.0 |
Financing |
|
|
0.0 |
0.0 |
(0.9) |
(0.8) |
(0.0) |
0.0 |
0.0 |
(0.4) |
0.0 |
0.0 |
Dividends |
|
|
(1.6) |
(2.2) |
(2.0) |
0.0 |
(0.0) |
(2.0) |
(1.9) |
(4.5) |
(2.0) |
(2.0) |
Net Cash Flow |
|
|
2.9 |
0.3 |
(8.2) |
0.9 |
(3.5) |
(19.5) |
(3.4) |
43.0 |
29.1 |
35.5 |
Opening net debt/(cash) |
|
|
31.4 |
31.4 |
32.8 |
42.4 |
54.7 |
57.8 |
62.2 |
74.3 |
35.3 |
11.0 |
Finance leases initiated |
|
|
0.0 |
(0.0) |
1.5 |
1.6 |
(4.2) |
(3.2) |
(4.8) |
(4.8) |
(4.8) |
(4.8) |
Other |
|
|
(3.0) |
(1.7) |
(2.9) |
(14.9) |
4.6 |
2.1 |
(4.0) |
0.8 |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
31.4 |
32.8 |
42.4 |
54.7 |
57.8 |
78.4 |
74.3 |
35.3 |
11.0 |
(19.8) |
IFRS16 leases |
9.2 |
6.8 |
6.8 |
6.8 |
||||||||
Source: Company accounts, Edison Investment Research. Note: FY19 onwards is on an IFRS 16 basis and the opening net debt/(cash) position for FY19 has been restated accordingly.
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Research: TMT
Mondo TV has settled its outstanding tax disputes in respect of FY12 and FY14. While it maintains that the conversion of deferred tax assets into tax credits was implemented correctly, the potential for further disputes with respect to similar procedures carried out in other years makes this a sensible and pragmatic resolution. The potential risk from the claims in full in respect of 2012–19 was up to €30.8m, plus legal costs. With penalties and interest, the total payment now agreed for 2012–19 is €2.8m, to be paid over four years from FY21. Our last published model derived an expected end-FY21 net cash figure of €4.7m, so this settlement is unlikely to materially compromise the group’s ability to fund its growth programme.
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