Accrol Group Holdingshttp://www.accrol.co.uk TICKER: ACRL EXCHANGE: AIM
Accrol is the UK’s leading independent tissue converter. It manufactures toilet rolls, kitchen rolls and facial tissues, as well as other tissue products at its manufacturing, storage and distribution facility in Blackburn, Lancashire.
A strong first half was reported today with revenues 8.8% higher y-o-y to £63.9m, at an improved 28.4% (H1 15/16: 27.3%) underlying gross margin (excluding derivative gains). That reflects an ability to negotiate parent reel prices underpinned by currency hedges put in place before and since the EU referendum. Adjusted EBITDA was 1.5% up y-o-y at £7.1m; positive cashflow is reflected in £3.2m lower net debt at £19.9m vs just after the June 2016 IPO.
The outlook appears underpinned by new business wins in H1, including Lidl which is expected to provide more than the initially anticipated £10m pa of sales. That built on previous discount sector wins (Booker - £6.5m, Poundstretcher - £5.0m). Capacity and output will benefit from investment in production facilities and operational improvements.
Potential earnings and dividend growth over the new few years should benefit from operational gearing, with spare capacity ready to meet demand from discounters and multiples. That highlights competitive positioning and an undemanding valuation considering the prospective yield of 4.8% this year, strategic positioning and 8.1x PER for FY16/17.
Accrol's listing today on AIM brings to market one of the UK's leading manufacturers of tissue products including toilet rolls, kitchen towels and facial tissues. The group has a strong existing portfolio of major discount customers including Bookers, Aldi, Home Bargains, B&M and Poundstretcher, and leading multiples such as Tesco, Morrison's and Asda. We believe it is uniquely positioned to pick-up further market share and capitalise upon growing demand for private-label products in its field.
The business looks well-placed to continue to grow revenues organically at margins well-above its peer group. It seeks to build on an existing 35% share of a fast growing component of UK retail by leveraging its position as a volume manufacturer, with a comprehensive product range and spare capacity to meet demand post recent investment in production facilities.
Its independence allows it to access a larger addressable market than most of its peer group and it can also compete on price without sacrificing margins. An earlier decision not to operate its own paper mill means it can source 'raw materials' less expensively from overseas suppliers, and take advantage of current market oversupply.
The group has a strong financial track record and continued to grow throughout the recession. IPO proceeds of £43.3m will repay existing shareholder loan notes, significantly reducing net debt to £23m and interest costs. That frees up cash for expansion, and recent investment in plant means there is only modest capex planned during the forecast period. Management would consider complementary acquisitions.
There is a progressive dividend policy and intention to pay combined dividends for the financial year to 30 April 2017 equivalent to a 6% yield on the issue price. On our forecasts the shares are attractively rated on 9.3x April 2017 P/E and 7.1x EV/EBITDA, materially below the average for its combined sector/small cap consumer peers.