Accrol (LSE: ACRL) has only been a public company for 11 months, but during this time the business has made a considerable impact on the market.
Initially, the company’s outlook appeared bright. Demand for its paper products, which includes toilet paper, kitchen towels and facial tissues was rising with revenue for the year to April 30 up 14.2% year-on-year and EBITDA up 6.8% to £16.1m. A 4.3% dividend yield was also on offer.
Unfortunately, two months after publishing its figures for the year to April, the company stunned the market by warning on profits, announcing a previously undisclosed legal battle with the Health and Safety Executive (HSE) and suspending its shares.
From bad to worse
Since the suspension, the company’s prospects have gone from bad to worse. It pleaded guilty to a single health and safety regulatory offence arising out of an incident whereby an employee sustained a severe injury to the top of his right index finger. Fines from this incident could be between £550,000 and £2.9m.
Meanwhile, the cost of the pulp the company uses in its products has jumped by nearly 41% since the beginning of the year, and Accrol has struggled to pass higher prices on to customers — a sudden reversal from the group’s past cash generation.
With a hefty legal bill to pay, costs spiralling and margins contracting, it has been forced to ask shareholders for more cash to keep the lights on. Today, along with the lifting of its suspension, it announced that it is planning to raise £18m by way of a placing to meet working capital requirements at a 60% discount to the pre-suspension price. The company is placing 36m new shares at 50p.
Is the outlook improving?
Accrol’s management believes that the £18m placing will be enough to return the company to business as usual. The good news is that some customers are now accepting price hikes, which has taken some pressure off the firm.
As well as reinforcing the balance sheet and hiking prices, management is also looking to cut costs by around 6% by reducing the employee headcount by 89 and cutting the number of products offered. These efforts are expected to return the business to profit on an EBITDA basis for the year ending April 2019.
So, it has a plan in place to get back to growth and profitability. However, I think it’s going to take a lot more work for Accrol to regain investors’ trust in the business. The firm has effectively imploded over the past six months, and the speed of the implosion has been staggering.
What’s more concerning is the way management has treated investors. There was no prior disclosure of the HSE investigation before the suspension, and in a trading update published on September 7, it made no mention of the rising price of pulp compressing margins, even though today management claimed that these costs have been proving to be a headwind since the beginning of the year.
The bottom line
Overall, I’m not buying Accrol after today’s declines. The firm’s performance since it became a public company has been extremely disappointing, and it looks as if the business is going to struggle to return to growth in the next few years. There are better buys out there.
