David Holding looks at a British manufacturing firm that is profitable and looks like good value.
The last year was a tough one for British Polythene Industries (LSE: BPI); the largest manufacturer of polythene film, bags and sacks in Europe.
What's that, a British company that actually makes things; are you mad!? Maybe. It's certainly not easy to manufacture and sell real goods in the UK at the moment as BPI's final results for 2008 testify. Increases in raw material and energy costs and a drop in demand from builders were the biggest challenges the Greenock-based group had to face.
These factors combined to send profits before tax (and restructuring costs) down to £9.3m from £12.2m in 2007 on sales of £481m -- and the final dividend was reduced to give a total of 14.5p to "preserve cash and support the balance sheet."
Of course, the results did absolutely nothing for the share price in the current climate, which languishes at 135.5p valuing BPI at just £36m.
So what's the appeal?
Well, the results seemed remarkably robust to me given the state of the market and the higher energy costs. If BPI can turn in a reasonable performance as the cold economic winds blow, then surely it can do even better in a more benign climate? And that's exactly what the chairman thinks will happen this year after his company had some tough decisions to make recently -- notably deciding to close down the group's Stockton site. Overall, he's cautiously optimistic as sterling's weakness and lower costs have combined to improve things a little. Also, the defensive sectors of the business -- agriculture, retail food and related transit packaging, healthcare and refuse sacks -- are putting in a resilient performance.
Notwithstanding all the problems of 2008, earnings per share before restructuring costs still came in at 25.5p, placing BPI on an historic P/E ratio of a little over five -- and very probably lower going forward. The price to sales ratio is also a temptingly low 0.07 and the shares are yielding a massive 10.7%; clearly the market has little faith in the company's ability to maintain its payout. But there's good downside protection, too, as the shares are currently trading at a healthy discount to net asset value.
There is net debt on the balance sheet, which may put off hardened value investors. It increased from £65m to £76m last year, as adverse exchange rate movements caused borrowing levels to rise in sterling terms.
Director buying
The chairman has put his money where his mouth is -- buying large quantities of shares steadily at prices around 235p. A recovery to that level over time would reward investors today with over 70% return on their capital. Of course, that's easy to say -- but it might just happen.
The chart tells a sorry tale, like many others these days. Around two years ago, the shares went over £7 for a short while. But for the optimists and contrarian investors amongst us, this isn't necessarily a bad thing.
The problem is that BPI has looked like good value for a long time but the share price has been declining steadily. Investors buying today need nerves of steel, but if you don't buy at a knock-down price in a recession, with some balanced optimism for future performance and effective cost-cutting measures in place, when do you buy if you're luck enough to have any cash left!?
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David owns shares in BPI.
