Essentra PLC

Essentra PLC (ESNT) is a Milton Keynes, United Kingdom-headquartered a manufacturer and supplier of essential components and solutions, including caps, plugs, plastic, fibre, foam and packaging products, which are differentiated in three separate operations, namely Filters, Packaging and Components. The group is the only global independent provider of filters and related solutions to the tobacco industry and is a leading global manufacturer and distributor of a comprehensive range of components, which are used in diverse industrial applications and end-markets. Its products include cartons, leaflets, self-adhesive labels and printed foils used in blister packs, and is one of the very few multi-continental suppliers of a full secondary packaging range to the health and personal care sectors, helping the group to capture a distinct market and maintain margins.

Trading Update
Despite some short-term Brexit impacts and a tougher macroeconomic environment, underlying revenue in the third quarter of the financial year 2019 was broadly flat, while group like-for-like revenue declined 2.9% for the period (-0.6% underlying). Short term factors consistent with the profile of the business resulted in a revenue decline in Filters, underlying mid-single-digit revenue growth in Packaging was in line with expectations, and total components revenue was marginally up on the prior-year period.

Financial Highlights (H1 2019, in £m)
 
(Source: Company Filings)

Due to the cessation of Speciality Tapes in Nottingham at the end of 2018 and the closure of the Kilmarnock and Largo consumer packaging sites, HY 2019 revenue decreased by 1.3% (-2.7% at constant FX) to £506.6 million, while it increased by 1.3% on like for like basis. Reflecting the operational efficiency gains in Filters, the impact of price increases in Components and the strong revenue performance in Packaging, operating profit on an adjusted basis was ahead by 11.0% (9.6% at constant FX) at £48.3 million, while reported operating profit was £60.1 million compared to £26.0 million in HY 2018. Adjusted profit before tax rose by 8%, and 6% at constant currency basis, to £41 million from £38 million in the prior year, while reported pre-tax profit was up to £53 million from £21 million in the prior year, which included an exceptional pre-tax credit of £22.9 million. On a total reported basis, net income was £32.2 million and earnings per share was 11.6p compared to £16.6 million and 5.7p respectively in HY 2018, while on an adjusted basis, net income was reported at £33.1 million and was up by 8.1% (7.0% at constant FX) and adjusted basic earnings per share rose by 9.1% (7.5% at constant FX) to 12.0p. The adjusted free cash flow of £22.6 million was unchanged versus £22.6 million in HY 2018. Adjusted operating cash flow was 0.5% higher than the previous year at £36.6 million (HY 2018: £36.4 million). Before applying IFRS 16, net debt to EBITDA was 1.4x as the net debt was £192.8 million, while after applying IFRS 16, net debt to EBITDA ratio was 1.6x as the net debt was £242.0 million.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at 28-October-19, before the market closed (Source: Thomson Reuters)

On 28 October 2019, at the time of writing (at 10:28 am GMT, before the market closed), ESNT shares were trading at GBX 393.8, down by 1.4 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 443.84/GBX 324.80. The company's stock beta was 1.56,reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.05 billion, with a dividend yield of 5.18 per cent.

Conclusion
While the company kept its guidance for the year unchanged, as comparable revenue for the Components division declined modestly in the third quarter and reported a 2.9% drop in like-for-like revenue for the third quarter of 2019. The group blamed macroeconomic risks and uncertainties as to the reason behind the decline in revenue, including Brexit problems and softening of US and China markets, both of which are not expected to improve in the short-term. This can put pressure on the financials for the group, which might result in a cost-cutting and other measures.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 399.4 (as on 25 October 2019), while we look for any upcoming catalysts in the near term.
*Peers of the company are Coats Group PLC, Discoverie Group PLC, BBA Aviation PLC, James Fisher and Sons PLC and Rentokil Initial PLC
*All forecasted figures and peers have been taken from Thomson Reuters.

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