MPAC (formerly Molins) is a specialist provider of high speed packaging machines (76% of sales) and complementary services (24%, eg spares/maintenance) with c. 350 staff. The group was rebranded MPAC in Jan’18, encompassing the design / manufacture of cartoning equipment, case packers, end-of-line and robotic packaging solutions, as well as undertaking turnkey projects involving the design/integration of packaging systems.
Since taking the helm in June’16, CEO Tony Steels has engineered a meteoric turnaround at MPAC. Firstly, disposing of the sub-scale tobacco division to GD Spa for gross proceeds of £30m (£23.5m net) in August 2017. Then refocusing the business entirely on niche, high-speed packaging solutions within the ‘sweet-spot verticals’ of pharmaceuticals (eg powders), healthcare (contact lenses) and food/beverages. All benefitting from the shifts towards urbanisation, convenience, recycling and nutrition – whilst also expanding at 4%-5% pa (vs global GDP ~3.5%).
What’s more, the company believes it can double this growth rate over the economic cycle – thanks to greater market penetration, higher attachment rates between original equipment (76% sales) and services (24%), new product launches (eg incorporating advanced soft/firmware), x/up-selling and end-to-end solutions. Which, combined with favourable operating leverage and tight cost control, should enable MPAC to meet its ‘ambitious’ (vs past performance) and ‘industry leading’ goals of delivering 10% pa LFL top-line growth alongside 10% EBIT margins.
In order to convert these plans into reality, more investment is required with the firm’s £29.4m cash-pile (as at Dec’17) being ear-marked for a step-change in both organic (eg R&D) and acquisitive growth. For instance, developing/launching innovative new machines (eg integrating remote diagnostics, data analytics and artificial intelligence), further expanding the Service proposition and selective M&A. The latter probably involving the purchase of specialist know-how, smart factory technology and/or solutions capability, whilst being within the £10-£30m price range and offering IRRs above 15%. Hence the Board’s decision today to temporarily suspend the dividend – and instead allocate the capital to internal (primarily) and corporate development.
The #1 takeaway for investors in today’s fy results was the “excellent” LFL growth, with order intake (£61.1m) and turnover (£53.4m) climbing 21% and 29% respectively – on top of a 1.14x Book:Bill ratio. In turn, exceeding our estimates, with revenue growth broadly split volume (ED Est +21%), forex (+6%) and price (+2%). Divisionally, Original Equipment jumped +40.3% to £40.3m, which was complemented by a small uptick in Service +2.4% (£13m) – although we expect the latter to materially improve in 2018 helped by the July appointment of an experienced Services exec.
With regards to this year, revenues are forecast to rise +10% to £58.7m, with adjusted EBIT and EPS coming in at £2.8m (vs £1.3m LY) and 9.9p (4.2p) respectively – supported by further operational efficiencies and 30% EBITDA drop through rates. LY’s improvement in gross margins (28.4% vs 27.2% LY) was tempered slightly due to a fall in Service, reflecting adverse mix from spare parts to new equipment. Nevertheless, given the “excellent” strategic progress made over the past 12-18 months and enhanced pension position (re robust investment returns), we have upgraded our valuation from 180p to 225p/share.