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Plastics Capital, the AIM quoted consolidator of plastics products manufacturers has this morning released results for the year to March 31st 2010, which are in line with last April’s guidance, together with an upbeat statement; ‘…The Board is confident of another year of significant progress.’ We have maintained our financial year 2011 pre-tax expectation at £ 3.125 million and introduced an indication for 2012 of £ 3.8 million and have increased our target price from 50.3p to 52.6p and, with the shares at 30p, our stance remains buy.

Sales revenues for this exported orientated business dipped 5.3% year on year to £ 26.688 million, principally as a result of volumes falling by 10%. However, volumes have been, and continue to, recover strongly from their low point.

Gross profit was somewhat impacted by rising raw material costs in one of four divisions. Prices for the engineering plastics grades were broadly stable throughout the year although the group’s specialist packaging division had to cope with escalating polyethylene prices, which ended the year approximately 30% higher than at the start. The company managed to recover some of the increase through price increases, which is an on-going process. Polyethylene prices may now be peaking and might edge down during the current year.

Underlying EBITDA increased by 22.2% to £ 5.062 million as the business responded to earlier productivity and cost reduction actions which cut employment costs by £ 0.379 million, and Plastics also gained from a more favourable exchange rate. The group’s key trading currency exposure is the US dollar while approximately half the balance sheet exposure (i.e., debt) is denominated in Euros. Consequently, the group’s EBITDA benefited by £ 0.938 million while excluding for the impact of derivatives, net financing costs went from £ 1.413 million to 31.252million and as a result the group paid down £ 2.9 million of debt to end the year with borrowings of £ 16.1 million. Basic earnings per share from continuing operations swung 20.5p from a loss of 13.3p to earnings of 7.2p.

In line with the group’s previously articulated strategy of concentrating on organic growth and debt reduction, the balance sheet has continued to strengthen. Net bank debt has fallen from £ 19 million to £ 16.1 million resulting in gearing all gearing ratios improving.

Based on the assumption that there will be no acquisitions and £ 1.5 million of capex to enhance the higher organic growth opportunities particularly in Thailand over the next two financial years, we would anticipate further substantial improvement in all the gearing ratios and the elimination of an additional £ 5 million of debt bringing the outstanding debt to around £ 11.1 million by the end of the 2012 financial year.

The group has started the current year well, with ‘…Order books … stronger that they have been for the last 18 months. ‘However, the recovery remains fragile within the Eurozone although considerably stronger in other parts of the world, especially the Asia/Pacific region, which is the group’s key identified region for accelerated expansion. Indeed, the group is expanding output from its Thailand factory while increasing working capital and investing in new products. Although this additional investment together with some firming of raw material costs may rein in earnings growth for the current year, we would expect the investment benefits to accrue during subsequent years, i.e., from and including 2012.

With the shares trading at 30p, the market capitalisation is £ 8.09 million but the Enterprise Value is £ 24.23 million (based upon net debt as of 31 March 2010) or 4.79 times FY2010’s EBITDA of £ 5.06 million. It is our expectation that by the end of the financial year to 31 March 2012, net debt will have declined to £ 13 million and that if the shares traded on the same EV/EBITDA multiple, based on 2012 forecasts, the share price would be 52.6p.

However, we do not consider an EV/EBITDA multiple of 4.79 times demanding and if Plastics Capital continues to deliver steady growth in sales and profits as well as demonstrating its ability to pay down debt at a rapid rate then the shares could readily command a higher multiple. Therefore, we are increasing our target price to 52.6p and at 30p we re-iterate our recommendation of buy.

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