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Plastics Capital: Positive Trading Update Confirms Forecasts; Target Price – 116p; Reiterate Buy

On 18th April, Plastics Capital, a consolidator of plastics products manufacturers focused on proprietary products for niche markets that exports over 60% of its sales, released a positive trading update that indicated that expectations will be met when full year results are released in late June.

Since the close of the first six month trading period that ended on 30th September 2010, trading conditions for this major UK exporter have continued to improve with underlying demand growth running at about 10% pa. Although second half’s growth rate moderated from the heady rates seen following the period of global economic rebound when customers were restocking inventory. However, the group has remained successful in securing new business, particularly within the important and expanding Asia Pacific markets, especially China and India, which augurs well for the future.

The company has maintained strong control over its cost base so the sales growth has not been at expense of either profit margins or cash generation. Consequently, we are maintaining our existing profit and earnings per share expectations while debt continues to reduce. We estimate that net debt closed the year at £12.1 million and could fall to around £10.3 million for the current year to 31st March 2012, which compares with peak net debt of £19.6 million in 2009, despite the company investing in improving its existing manufacturing facilities and expanding its international operations.

We continue to value the company on a 2012 EV/EBITDA multiple of 7 times, a discount of about 10% to the sector’s average, which implies a target price of 116p. Therefore, with the shares trading at 90p and a target price of 116p, we reiterate our recommendation of BUY.

Forecast Table

Notes:

1 Profit before tax, amortisation, exceptional items and unrealised foreign exchange/derivative gains and losses.

2 Tax charged at 28%.