Shares in British Polythene have roared ahead over the last six months. So is it time to take a profit?
When I last wrote about British Polythene Industries (LSE: BPI) in early March, the shares were languishing at 135.5p which valued Europe's largest manufacturer of polythene film, bags and sacks at less than £36m.
But that was March when the economic and investing world was a very different place to that of today where there's a distinct feeling of euphoria after the six-month rally. This is a great worry to us contrarians, but all you can really do is look at individual company valuations and prospects.
Still too cheap
And on that score BPI has done exceptionally well, going up by over 80% to its current level of 245p, which values the company at a more realistic £65m. So is it time to take a profit? In a word, "no", in my opinion. A lot of water has passed under BPI's bridge since March. The interim results to the end of June revealed pre-tax profits of £9.1m up from £7.2m the previous year on turnover of £231m. Basic earnings per share (EPS) came in at 23.2p, whist diluted EPS before restructuring costs were over 28p.
We also heard that the full year outcome for 2009 is expected to be better than last year despite the fact that the second half continues to look challenging with demand continuing at lower levels and the suppliers seeking raw material price increases. To combat this, BPI has taken steps to reduce capacity in line with demand and lower the cost base.
Robust performance
Predictably and prudently, the interim dividend was cut to 3.5p bringing the annual total to a sensible 11p which still means the shares are still yielding a healthy 4.5% at today's price. And this could rise when the company is feeling more confident about the future. Make no mistake; these were excellent results in this difficult time, hence the rise in share price. In fact, BPI almost met full-year forecasts in the first half alone. The company expects the second half to be better than last year when it made EPS of 4p. Meanwhile, net borrowings reduced to £55m whilst net tangible assets stood at over £35m.
Despite the substantial rally, the shares remain on the very undemanding forward price-to-earnings ratio of less than 8 for this year falling to 7.4 next according to brokers' consensus forecasts.
Longer term
This looks too low given longer term prospects. The last couple of years have been atypical for BPI given the exceptionally high oil price of last year and much higher gas and electricity prices. All this, of course, was exacerbated by the economic crisis and consequent falling demand. And we certainly aren't out of the woods yet. But the company's cost-cutting measures and its focus on defensive sectors of agriculture, food retailing and healthcare will see it through.
In fact, almost a third of turnover now comes from supermarkets and a further 30% from agriculture. BPI is also the world's largest recycler of polythene waste and has pioneered ways of recycling a wide range of plastic products. Its recycling plants reprocess over 70,000 tonnes of UK waste from industrial, commercial, agricultural and domestic sources.
So whilst the shares may have done exceptionally well in recent months, it looks much too early to take a profit -- and the valuation remains low by historical standards despite similar levels of earnings. If the company can do this well through the worst of times, it surely deserves a higher rating given its likely performance in a more benign economic climate.
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David owns shares in BPI.
