Gamble of the week: An overlooked plastic bags maker

published 25 August 2014

When it comes to investing, the financial world likes to see a good story for people to buy in to. Yet, often these story' stocks are the worst kind of shares to buy, as the hype never turns into reality. So there's nothing wrong with dull, if you can make money from it.

And when it comes to dullness, the subject of polythene and plastic bags is probably near the top of the list.

This company makes its living from manufacturing and selling these things. It strikes me as a decent business that has been ignored by lots of people because it's just not interesting enough. I reckon it made a return on capital employed of 14.8% in 2014 not stellar, but none too shabby either.

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Like a lot of companies whose profits move up and down with the economic cycle, British Polythene Industries (LSE:BPI) has had its fair share of problems over the years.

It was hit very hard by the last recession and had to cut its dividend. Thankfully, its troubles seem to be behind it now and in recent years profits have been growing nicely and are expected to keep on doing so.

The company has been investingmoney in new plant and equipmentto make itself more competitive. During the last few years it has also repositioned itself to focus on areas that can grow but at the same time are not too volatile.

BPI gets nearly three quarters of its sales from sectors such as agriculture (silage bags, crop protection, fertiliser and animal feed bags), food packaging, health-care and waste recycling. It gets most of its profitsfrom mainland Europe.

BPI has been aiming to profit fromthe growing trend towards thinnerpolythene films as companies try to cuttheir packaging costs, and it is makinggood progress on this. It should alsobenefit from improving constructionactivity in the UK.

The other issue is the priceof its key raw material polyethylene which is closely linked to the price of oil.

Should we see a spike in the oil price,then BPI may find it hard to recover anyextra costs from its customers. It alsohas a sizeable pension fund deficit thatneeds tackling.

City analysts are cautiously upbeat andexpect another year of decent profitsgrowth. Yet the shares trade on less thanten times projected earnings. Even withthe potential risks, these look relativelycheap and could be worth tucking away.

Verdict: a risky buy

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.