Mpac Group: making steady profits from premium packaging

The word “packaging” calls to mind a commoditised industry and visions of Amazon’s cheap cardboard boxes. But specialised forms of packaging require sophisticated packaging machinery and provide much more value. A good example is the pharmaceuticals industry, where packaging requires sterile conditions and accurate dosing.

Britain’s Mpac Group (Aim: MPAC) is a key player in the field of specialised packaging. It designs and makes the automated packaging machines needed for the healthcare and food industries. Approximately 50% of its revenue comes from the healthcare sector, with another 45% from food and beverages.

A global footprint

Mpac has installed more than 10,000 of its packaging machines in 80 countries and has many blue-chip customers, including 3M, Abbott, CooperVision (a leading manufacturer of contact lenses), Diageo, GSK, Johnson & Johnson, Kraft and Smith & Nephew. It is a truly international company, with 64% of sales made in the Americas, 28% in Europe, the Middle East and Africa (41% of this from the UK) and 8% in the Asia-Pacific region. It services its own machines to maintain optimal performance for customers, with service accounting for 22% of sales and original equipment for the rest. Mpac has two innovation laboratories working on improving packaging machinery and 180 of its 500 staff are engineers and designers.

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The company has a five-step approach to a job. First, it establishes exactly what the customer needs, then designs innovative machines to meet those needs, installs them, monitors performance and finally optimises performance through regular servicing and upgrades throughout the machine’s life. Mpac has an excellent record of growth through a combination of organic growth and acquisitions. Turnover more than doubled to £88.8m between 2016 and 2019. It acquired Lambert Automation in 2019 for £15m. Lambert specialises in healthcare-automation and packaging.

Mpac’s full-year results for 2019 show revenue of £88.8m, up from £58.3m in 2018. Underlying pre-tax profit was £7.5m, up from £1.4m. In December 2019 there was net cash of £18.9m on the balance sheet. The half-year results to 30 June 2020 showed the effects of the virus, with sales down by almost a fifth from the same period in 2019. However, the order book at the end of June 2020 was up by 14% year-on-year at £45.4m. What seems to have happened is that several projects were delayed by the first wave of the virus.

Exceeding expectations

The trading update for 2020 as a whole was issued on 7 January 2021. Encouragingly, this update reported trading performance ahead of market expectations. The order book going into 2021 stands at £55.5m, with no orders cancelled due to the virus.

The update also reported that the acquisition of US firm Switchback Industries in September 2020 for $15m had been successfully completed, with the purchase adding to earnings and fully integrated into the overall group. Switchback provides automation and packaging for the food, beverage and healthcare sectors, Mpac’s core areas of activity. The update stresses the absence of order cancellations and says that virtual exhibitions have been held for customers throughout the difficult Covid-19 period, with customers being offered digital solutions for remote machine testing and servicing.

Equity Development, the equity research company, said in July 2020 that there was scope for Mpac to win market share as clients settle on best-in-class original equipment manufacturers who can provide worldwide service and fully integrated smart-factory technologies.

Looking forward to 2021, Mpac’s medical-grade packaging expertise should enable it to take a slice of the market for packaging Covid-19 test kits and vaccine ampoules. Panmure Gordon’s 2021 earnings-per-share estimate is 36.1p so, at the recent price of 490p, the forward price/earnings (p/e) ratio is 13.6. The balance sheet looks solid too. At the end of June Mpac had net cash of £22.5m, up from around £19m at the end of December 2019. The initial payment for Switchback was £10m, so at the end of December 2020 there would have been around £12m plus the cash generated in the second half (around £2.5m) on the balance sheet.

Why this stock ticks all the boxes

Mpac has most of the characteristics I look for in an investment – it invests in innovation, occupies a profitable and growing market niche, has sales spread over the main developed global economies, has net cash, a positive trading update and a lowish forward p/e ratio even though the share price has doubled since last May. It has not paid a dividend over the last few years because it has been investing in growth, but a dividend of 1.5p per share was declared for 2019.

The risks to the outlook include the potential delay of customers’ projects should the virus situation get worse, a change in the asset/liability ratio for the pension scheme and the usual problem of higher share-price volatility for smaller companies (Mpac’s market value is only £101m). At a recent price of 490p and a 2021 p/e of 13.6, this is a reasonable entry point. Mpac’s full-year results for 2020 are due in the first week of March and should prove encouraging. CEO Tony Steels said in the trading update of 7 January that “we will be able to report a robust financial performance for 2020 and a positive outlook for 2021, which is testament to the fundamental strengths of the group”.