Plastics Capital – growth foundations in place

Brought to market by chairman and founder shareholder Faisal Rahmatallah in December at 100p, Plastics Capital is an ambitious and fast-growing plastics and rubber company. Offering exposure to a consolidation mission in the niche plastics industry and having laid strong foundations for growth, the cash-generative concern enjoys high returns on sales and boasts defensive qualities based on diverse end markets for its products. In spite of all this, its shares trade on undemanding multiples.

Built up through acquisitions since 2002, Plastics Capital prised £16.2 million from investors in the midst of the credit crunch last year to help further its debt-led acquisitive strategy. Investors were no doubt attracted by the track record of Rahmatallah, who as chairman oversaw the growth and eventual £95 million takeover of AIM-star Broker Network, as well as Plastics Capital’s investment fundamentals.

Plastics Capital is focused on the large, highly fragmented global speciality plastics products market – commoditised product is not its game – in which acquisition opportunities abound, driven by owner-managers looking for a retirement exit. Target businesses typically lack critical mass and professional management and should not only generate cash, but also offer Plastics Capital an abundance of margin and operational improvement upside. Paying a low multiple, the group looks to use its cash flows to repay acquisitive debt as quickly as possible. Alongside acquisitions leaning towards earnings-enhancing bolt-on deals, there is much organic growth potential in this fragmented market, through entry into new markets and new product development.

During the year to March, four acquisitions were completed, of which two were bolt-on deals to strengthen existing divisions. Cobb Slater was acquired and then integrated into Plastics Capital’s thriving plastic bearings business, while Sabre was merged with the group’s flooring products and specialist extrusions operations.

The other acquisitions were Channel, number two player in ‘creasing matrix’ production, which Plastics Capital then successfully consolidated with the third-biggest player, leaving it hot on the heels of the market leader with a 40 per cent share. Shortly before the end of the financial year, film packaging concern Palagan was acquired for £6.4 million (in a deal entirely funded by debt), creating a new platform for growth. That Plastics Capital was able to fund such a deal in the tight credit markets speaks volumes for the cash flows that its businesses enjoy, as well as its bankers’ enthusiasm for the fundamentals of its buy-and-build mission.

Given the economic slowdown in the UK and US, Plastics Capital is afforded much resilience by its geographic and product application diversity. Says Rahmatallah, ‘We export 50 per cent of what we produce to approximately 75 countries around the world, with 25 per cent of our business going to South East Asia [where a new low-cost factory opening this year will fuel and facilitate growth]. And our industry spread is equally important. As well as sales to the packaging industry, we sell into markets such as business machinery, building and automotive. And even our largest sector, packaging, represents only 20 to 25 per cent of our business.’

Recent full-year figures to March showed pre-tax losses of £2.9 million, reflecting a transformational acquisitive year and ensuing restructuring, with year-end net debt comfortable at £16.3 million. However, that masked bountiful growth, with sales growing by 33 per cent to £20.5 million (acquisitions contributed £4.3 million) and the annualised run-rate building to £31 million. Volatile currency movements are an occasional downside to the company’s geographic strength, with sales growth at constant exchange rates closer to 35 per cent. At the EBITDA level, before one-off items, earnings rose to £3.9 million (2007: £2.6 million), a metric that is forecast to hit £6.2 million this year. EBITDA margins moved higher to 19 per cent (2007: 16.6 per cent), demonstrating management’s ability to buy high-margin businesses and drive improvements from them.

Despite a troublesome economic backdrop, Rahmatallah assured, ‘We’ve seen no erosion of margins. All of our product areas are reasonably high margin, although the mix can change from time.’

This year, analysts are forecasting ‘adjusted’ pre-tax profit growth from £2.6 million to £4.3 million, from a top line approaching £32 million, ahead of £4.8 million from £34 million sales the following year. Further planned acquisitions will naturally alter that picture, but based on those estimates, Plastics Capital’s forward

rating of less than ten times looks decidedly ungenerous given its margins, management and attractive consolidation mission.