Gamble of the week: British polythene maker

published 13 April 2012

2011 was a challenging year for Britain's industrial and construction sectors. That's why domestic volumes fell 5% for polythene films maker British Polythene Industries (BPI). However, regardless of testing conditions, which were compounded by rising input prices, BPI's figures for 2011 were impressive.

Turnover was up 6% to £508m as higher raw material costs were passed on to customers. Underlying earnings per share (EPS) rose 22% to 46.9p, with net borrowings closing £15m lower at £31m.

Fortunately the company saw this soft patch coming and reacted quickly. It has now closed three factories (Stockton, Brampton and Swansea) and refocused on higher value added products. Capacity is now much better aligned to demand, so that when a sustained economic upturn gets under way the group should generate even stronger returns.

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BPI has also expanded (66% of EBITA) into mainland Europe and America, where it provides farmers with crop covers, large sacks and bale/silage wraps. Granted this year's growing season is unlikely to be quite as long as in 2011, but the firm should still benefit as depleted stocks have yet to be replenished.

Of its revenues, 35% are generated from agricultural/horticultural, with another 31% coming from food retail, where it sells stretch wrap for pallets and bags for fresh and frozen ingredients. Add on 7% for the healthcare and waste sectors and all told the group derives 73% of its business from relatively defensive areas. That is helping to lift its return on capital employed to 15.5%.

British Polythene Industries (LSE: BPI)

This figure could continue to move higher, thanks to the firm's expertise in recycling polythene. This reduces overall costs and improves resource utilisation.

For 2012 house broker Investec is forecasting turnover and underlying earnings per share (EPS) of £518m and 50.4p respectively, rising to £529m and 52.3p in 2013. That puts the stock on a frugal price-to-earnings (p/e) ratio of less than seven, with a dividend yield of 3.6%. I would rate the stock on a ten-times EBITA multiple. Adjusted for net debt of £31m and a £61m pension deficit that delivers an intrinsic worth of 450p.

Margins could be affected by raw material costs and a shortened harvesting season, but it should be able to tough these out. The next trading statement is due out in May.

Rating: SPECULATIVE BUY at 340p (market capitalisation £90m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.