Toilet rolls are big business. Accrol Group Holdings (LSE: ACRL) sold £135.1m of tissue products last year, 14.2% more than during the previous year. Pre-tax profit rose by 29.3% to £7.4m. Shareholders will receive a final dividend of 4p, giving a total payout of 6p for the year just ended. That gives a dividend yield of 3.9% at the current share price of 153p.
Accrol describes itself as a tissue converter, which means that it converts so-called primary rolls of tissue from paper mills into products such as loo paper, tissues and kitchen roll. The company’s main business is producing and supplying branded and private label products for supermarkets. A particular focus is the discount sector, where it has a market share of more than 50%.
It’s tempting to think that this recently-floated stock could become an attractive income growth play.
Why I wouldn’t buy
Last year’s financial performance was very solid. But there are a number of things about this business which concern me. One risk, in my view, is that the firm’s customers will never allow it to be too profitable. The company’s gross profit margin fell from 29.2% to 27.9% last year. The group’s operating margin, which includes a wider range of costs and expenses, fell from 10.1% to 7.8%.
In today’s results, chief executive Steve Crossley comments that input costs are rising. He notes that “we continue to seek inflation recovery”. According to Mr Crossley, retailers are increasing their prices “slower than expected”. These comments seem to confirm my view that this business’s customers will use their negotiating power to keep prices down. I suspect it will be difficult for Accrol to regain this lost margin.
On that basis, I’d argue that on a forecast P/E of 11.5, Accrol stock is probably fairly priced.
One I would buy
For consumer goods firms, the secret to pricing power lies in having strong brands. One company which understands this is FTSE 100 group Reckitt Benckiser Group (LSE: RB), which owns brands including Dettol, Nurofen, Harpic and Strepsils.
Producing these branded goods isn’t necessarily any more expensive than producing own-label products for supermarkets. However, their premium positioning and customer appeal means that prices and profit margins tend to be higher.
Reckitt has generated an average operating margin of 24% over the last five years. The group generates a huge amount of free cash flow, enabling it to invest in new products and acquisitions without excessive levels of debt. Although the group’s recent $17.9bn acquisition of Mead Johnson will result in raised debt levels, I’m confident its cash generation will enable it to repay this additional borrowing promptly.
The stock has fallen by about 5% from the all times high of £81 per share seen at the start of June. Reckitt was also hit by a recent cyber-attack and said the disruption this has caused is expected to reduce full-year sales growth from 3% to 2%.
In my view, this is just a short-term blip for this impressive growth business. Although the stock is expensive on 22 times forecast earnings, I think the firm’s defensive qualities mean that it’s worth considering as a long-term buy.
