Molins

LONG-TERM BUY

19/12/2011 Ben Jaglom

Defensive tobacco services specialist Molins (MLIN) offers a strong opportunity for those looking for a resilient play.

The FTSE Fledgling constituent carries out a number of tobacco-related services. Its divisions include its ‘scientific services’ operation, which provides testing and quality control for cigarette companies looking to pass regulatory hurdles. There is also its ‘packaging machinery’ division, which sells a variety of products for the packaging of products such as krispie snacks and alcohol swabs, and its ‘tobacco machinery’ division, which builds equipment for the manufacture of cigarettes.

Molins is led by Dick Hunter, chief executive officer since 2008 having joined the company in 2003. Prior to entering Molins he worked in a number of management roles at thread manufacturer Coats Viyella and at precision die-cast specialist Dynacast International. Overseeing activity at the company is chairman Avril Palmer-Baunack, the chief executive officer at vehicle transporter Autologic Holdings and a chairman at accident management outfit Helphire.

Counting the numbers is finance director David Cowen, who joined from luxury car manufacturer Rolls-Royce Motor Cars.

The non-executive team includes John Davies, a man who also worked at Autologic and a former manager in Lloyds’ asset finance division. The board can also turn to Phil Moorhouse, formerly a non-executive director at the Newcastle Building Society and a former finance director at vehicle hire concern Northgate.

Molins’ testing and quality control division, Cerulean, is based in both Richmond, Virginia, and at Kingston-upon-Thames in the UK. Cerulean carries out a variety of tests for manufacturers on cigarettes, which are required to pass a number of regulatory hurdles before being sold in the US and Europe. It is this division that has caught the eye of investors, as Molins operates in an area with considerable barriers to entry and with a limited number of competitors. In addition to Cerulean, Arista, its other business within this division, carries out a number of tests on cigarettes, cigars and tobacco-based products.

In its most recent results, for the six months to June, Molins declared a more than doubling in pre-tax profits from £1.7 million to £3.8 million on sales of £38.8 million (2010: £40.3 million). Underlying earnings per share rose from 2.5p to 6.3p. The dividend per share was flat at 2.5p while net funds grew from £3.9 million to £6.3 million. 

Its scientific services division declared operating profits of £900,000 (2010: £800,000) on sales of £9.3 million (2010: £10 million), with the higher profits and lower sales a result of a higher proportion of costs being spent on product development.

Its packaging machinery operations swung into a loss of £1 million (2010: profit of £400,000) on sales of £13.7 million (2010: £15 million) amid what it described as the ‘challenging’ economic environment.

Meanwhile, its tobacco machinery division reported a profit of £1.8 million (2010: loss of £400,000) on sales of £15.8 million (2010: £15.3 million). The group remarked that sales of new machines and considerable cost cutting improved performance, noting that the order intake for new and rebuilt machinery ‘increased marginally compared with last year’.

Analysts at Collins Stewart are forecasting pre-tax profits of £3.9 million for the year to December 2012 on sales of £85.6 million. In 2013, profits are expected to climb to £4.1 million on revenues of £86.8 million. A dividend of 5p a share is pencilled in for both years.

Molins is a company operating in a niche area of the tobacco market, but the key opportunity lies in the less-regulated emerging markets, in territories such as South-East Asia, Africa and the Middle East, which are expanding at a considerable rate at a time when the US and Europe are seeing a decline in cigarette consumption amid increasing awareness of its adverse health effects. Molins’ weaknesses include its enormous pension fund, valued at £327 million, with the group currently paying £1.2 million per year towards the scheme. 

Despite this, the shares hold considerable upside, operating in a highly defensive sector and offering a respectable dividend yield. Although unlikely to be a favourite with ethically minded investors, we rate the shares as a long-term buy.

Tags: Avril Palmer-Baunack, David Cowen, Dick Hunter, Smoking opportunity, Tobacco services specialist

Sector: Industrial Engineering

Companies: Molins

Market cap: £19m

PE Forecast: 6.0

Share price: 84p