Fiberweb (LSE: FWEB) makes non-woven fabrics out of materials such as polypropylene, polyethylene and polyester. These fabrics are used in many areas of day-to-day life, including protective housewrap in the building trade, artificial grass, crop protection sheets and filtration products.
The company has been fighting battles ever since it was demerged from aviation services group BBA in 2006. BBA stuffed it full of debt and a pension fund deficit, while the company also had to deal with hard-bargaining, powerful customers such as consumer products giant Procter & Gamble.
The price of polypropylene is closely linked to the price of oil, and Fiberweb has found it hard to push through price increases. Meanwhile, the collapse in the American housing market saw sales of its Typar HouseWrap product collapse.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Given all of these formidable problems, it's not too surprising that the shares have struggled to make headway for years. But there are signs that Fiberweb may now be sailing in calmer waters. The 2012 results saw underlying sales growing, while at the same time, cost cutting and efficiency gains saw profits and cash flow improve dramatically. The dividend was also increased.
I think that things can continue to get better for Fiberweb. Profit margins are still only 5%, with the company targeting 8%-10%. It wants to boost returns on capital employed (ROCE) to 15% it currently makes less than 10%. If it can do this, then Fiberweb could be a much more valuable business than it is now.
There's a lot more self help available to the firm. Costs should be taken out of the European construction business, where a recovery in demand looks a long way off. What's also encouraging is that more of Fiberweb's contracts have cost-recovery clauses, which stops profits from tanking when raw-material costs go up.
Of course, while cutting costs is all well and good, investing in Fiberweb shares is dead money without sales growth. But the outlook is promising on that front too. Fiberweb is stepping up investment in more profitable areas, such as geotextiles and technical fabrics. As a result, more of its sales should come from these areas. A recovery in the US housing market is also very helpful. This will help it meet its profit margin and ROCE targets.
Fiberweb's finances also look to be in very good shape. The pension-fund deficit has all but gone, while there is £14m of net cash on the balance sheet. This makes it a less risky investment.
The shares started the year well but have drifted lower over the last month. They trade on 11.9 times 2013 forecast earnings while offering a decent dividend yield of 4.4%. With 20% earnings growth expected this year and a further 17% in 2014, the shares look worth a punt at 75p.
Verdict: speculative buy at 75p
