Companies: MCB   

Timing is often everything in investment. Regardless of how sound the underlying investment, if you don't get the timing right, you are unlikely to get the returns appropriate to the risks you run, or the potential the business offers.

With this in mind, it is worth taking a look at McBride. This group has just emerged from a period of change and restructuring, is primed to reap the rewards of a £60 million investment programme, and is witnessing sales, profits and cashflow improvements.

For those less familiar with the stock, McBride is Europe's largest supplier of 'own label' household and personal care products to the retailing trade. It delivers everything from washing powders to toilet cleaners, fabric conditioners, kitchen cleaners and air-care products.

Its biggest – and most mature – market is the UK, where it conducts just under half of its business. In the half-year to December, sales in the UK rose just one per cent to £120 million and operating profit rose 17.2 per cent to £7.5 million.

However, while these increases seem marginal, chief executive Mike Handley reckons the performance was 'impressive considering the conditions'.

Private label products accounted for 24.1 per cent of the market – an increase of just 0.5 per cent. On top of this, there is considerable margin pressure as supermarkets flex their buying-power muscles to keep prices in their favour.

Says Handley: 'The UK market suffers from price deflation. But we have protected our margins by becoming as efficient as possible. We have re-engineered the business, looking for gains in everything from labour management, procurement and inventory management as well as manufacturing, transportation, and warehousing. Costs and wastage were also dramatically improved.'

Two unequivocally good developments in the UK were the move into a small operating profit for McBride's aerosol joint venture (last year a £15.8 million write-off dented the numbers) and the growth of McBride's 'minor brands'.

These are a range of skin products marketed under the 'Suncare' and 'Clean & Fresh' labels to small and niche retailers. Sales of these grew to £3 million and McBride's board reckons that a £15 million target is not unreasonable.

Over on the Continent, McBride's business is generally much more exciting. The company operates plants in Belgium, France, Italy, Spain and the Netherlands and has growing interests in Central Europe, particularly Poland (its main base), Hungary and the Czech Republic.

For the first time, half-year sales to Europe exceeded those achieved in the UK, both in terms of value and growth. European sales hit £129 million, an improvement of 7.1 per cent. Operating profits sprinted up 22.6 per cent to £6.5 million with net margins running at five per cent.

Handley remains enthused about Europe, as the market is less developed than the UK. 'The continent is undergoing a degree of retail consolidation, just as the UK industry has. Retailers there are keen to grow their own label offerings, so we remain confident of growth.' One example used by the company is France, its biggest non-British theatre. Own label products currently account for 11.4 per cent of sales, and many observers reckon the sector could account for circa 20 per cent in time.

On the pure financial front, the first half witnessed impressive operating cashflow growth – 67.5 per cent to £25.8 million. This was partly due to the aerosol joint venture not wrecking the accounts and partly due to a decrease in capital expenditure to £2.4 million. Although capital expenditure is likely to increase materially in the second half, it is expected to be lower than the £10.5 million spent in 2002 (and lower than depreciation charges).

The cash improvement allowed the company to reduce debts by £18 million to £76 million.

While the group will not find it easy to hit full-year profit expectations of £22 million, as the price of raw materials is outside its control and the supermarket giants will continue to be aggressive on pricing, Handley is in confident mood.

As he sees it, his market is growing, the company is finely turned, cash and debt are under control and the company has a perfect platform from which to expand its interests. Few are betting against his optimism. The forward p/e of 8.8 is too low.

McBride

GCI Recommendation

Buy

Mcbride	LSE	£203.73m	113.00p	-0.50p
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Other company articles:
Directors' Dealings			02/12/2003
McBride enters payout zone			02/06/2003
McBride			06/05/2003
McBride to take £16m joint venture hit			08/06/2002
McBride			07/06/2002