COMMENT
Stanelco Still Has More To Do

By Ed Bowsher (TMFArkle)
December 19, 2005

Stanelco (LSE: SEO) has a huge following on share discussion boards, and it's easy to see why. The company has several eye-catching packaging technologies and a partnership with Asda too.

The problem is that Stanelco is valued at £137m (14.65p share price), yet it only generated revenue of £1.33m in 2004. Stanelco needs some decent growth to justify the current price, and I'm not wholly convinced it will deliver.

Stanelco's best-known technology is Greenseal, which is used for packaging meat and other foods. Normally when you buy some lamb chops in a cling-film container, the plastic wrapping has been sealed in place by heat. Greenseal, by contrast, uses radio frequency (RF). In other words, high frequency radio energy generates lots of molecular agitation so that two materials can weld together.

Stanelco claims that RF sealing is 20% cheaper than using heat and there are fewer leaks. What's more, RF-sealed plastic trays can be recycled, unlike heat-sealed trays.

The company's big deal with Asda was announced in March. Asda said then that it expected its suppliers would convert several hundred machines to RF.

House broker Evolution has estimated that Stanelco could receive an annual licence fee of £25- £30,000 for each machine. Apparently, there are around 50,000 sealing machines in Europe and North America.

If Stanelco persuaded supermarkets and food manufacturers to convert 5,000 of those machines to RF sealing, Stanelco would receive annual revenue of something like £125m a year, perhaps more. Not bad for a company with a £137m market cap.

On top of that, Stanelco is developing several other products and technologies. These include starch-based materials such as a biodegradable cork for a wine bottle.

The company also announced a partnership last week with a US packaging company, Perseco, which has McDonalds (NYSE: MCD) on its customer list.

So why am I not wholly convinced?

It's partly the history of the company. This company has been operating for more than 50 years yet it hasn't had much success. Two years ago, it was convinced that its fortunes had changed thanks to a new technology for encasing pills. But then the company got mired in litigation with Bioprogress (LSE: BPRG) on patents.

Over the last two years, Stanelco has announced a flood of new initiatives which all appear to have great potential. But I can't help wondering whether the company should have concentrated on progressing Greenseal instead of all these new ideas.

After all, the Asda deal has progressed, but not as fast as some had hoped. Even Evolution has cut its forecasts and now expects sales of only £18.2m in 2006.

What's more, Ian Balchin, Stanelco's vice chairman and former CEO, doesn't appear to have been wholly convinced by all the good news. He sold a shed load of shares in the summer of 2004.

Last month, another senior executive exercised his options to buy around 1.1m shares at just under 2p, and then promptly sold half at 14p. If he had real confidence in the business, why didn't he keep more shares?

There have also been lots of boardroom changes, which don't inspire confidence.

Don't get me wrong, I'm not saying that Stanelco will definitely fail. It may be a great success in the end. But I'm not tempted to buy now.

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