There are typically only a few key events in a company’s life that can truly be described as ‘transformational’ but we think that Molins’ £30m disposal of its Instrumentation and Tobacco Machinery (I&TM) arm to GD Spa (part of packaging giant Coesia Spa) falls into that camp.
The deal in our view is a ‘home-run’ for both parties: enabling long overdue industry consolidation to occur at a time of overcapacity, increasing price competition, lacklustre growth and ongoing cost pressures from ‘Big Tobacco’, who are themselves merging.
Molins will have effectively swapped its high quality, yet ‘sub-scale’ I&TM unit for a sizeable chunk of cash. Thus providing vital capital to redeploy within its rapidly expanding and profitable Packaging Machinery (PM) division, where the fundamentals remain strong.
Out of the proceeds there are £2.7m of taxes (eg capital gains) and deal fees to settle, with a further £1.5m being held in escrow for up to 2 years (nb £0.75m accessible after 12 months), and another £2.7m will be injected into the UK Pension scheme – leaving net proceeds of £23.1m (or 114p/share). This will be used to fast-track PM’s expansion - particularly in primary (ie touching product) and secondary (outer-layer) packaging solutions for the Pharma, Healthcare, FMCG and Beverage sectors, that together are motoring along at a 5% pa clip (vs global GDP 3%-4%).
This morning Molins announced that it had also sold a property in Ontario, Canada to BuildCorp Limited for net proceeds (post fees/taxes) of CA$10.2m, or £5.9m. This, together with the I&TM disposal, means the Group now has ample financial muscle to selectively acquire complementary 3rd party assets that could benefit from PM’s geographical footprint, 1st class reputation & support infrastructure, in-depth industry knowledge and large embedded customer base. In turn generating significant synergies, and returns materially above the group’s cost of capital.
Our 2017 turnover and EBIT estimates have been upgraded to £49.8m (+20% vs £41.4m LY) and £1.3m (vs -£1.2m LY), reflecting the buoyant order book and YTD trading, with net cash predicted to close Dec’17 at £27m (or 134p/share). For 2018 we anticipate revenues and EBIT margins to climb to £54.8m and 4.6% respectively, thus driving our SOTP valuation up from 110p to 180p/share.