Zotefoams PLC

Zotefoams PLC (LON: ZTF) is a FTSE All-Share listed entity that develops cellular materials technology to manufacture demanding industrial products.

Investment Rationale – HOLD at GBX 417.92

• Solid Demand: The demand for polyolefin foams has rebounded strongly in most markets, while the order book remained robust for the remainder of FY21.
• Economic Recovery: British’s final manufacturing PMI (Purchasing Managers’ Index) has increased from 57.7 in September to 57.8 in October 2021.
• Dividend: ZTF had recommended an interim dividend of 2.10 pence per share, reflecting strong growth and positive outlook.
• Technical Indicator: From a technical standpoint, a 20-days EMA of GBX 382.54 indicates an upside potential in the stock price.
• Undervalued Multiples: On a forward 12-month basis, valuation multiples (EV/Sales, EV/EBITDA, and Price/Book) of ZTF are undervalued against the Basic Materials sector’s median.

Risk Assessments

• Subdued Activity Level: British’s final manufacturing Purchasing Managers' Index sank for a fourth month in a row in September 2021 to 58.6 in September from August's 61.4.
• Supply Chain and Inflation Concerns: ZTF has been facing significant supply chain inflationary pressures, high material, and freight costs. It can impact the Company’s gross margins.

Q3 Trading Update (for the third quarter of its financial year ending 31 December 2021, as on 3 November 2021)

• Top-line Growth: During Q3 FY21, Zotefoams recorded 11% growth in revenue from Q3 FY20 and 35% growth from Q3 FY19.
• Operational Achievement: The commercialisation discussions of our ReZorce® mono-material barrier technology continued to progress well.
• Good Visibility: It has good volume of orders confirmed for the remainder of FY21, and thus, FY21 financials are expected to be in line with the market expectations.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

 Conclusion 

The management looks confident about bright business prospects on the back of strong commercial momentum, solid cash generation, significant market opportunity, and operational resilience. Despite challenging supply-chain conditions from Brexit and COVID-19. ZTF reported strong growth in revenue in FY21 so far, reflecting favourable operational leverage from higher sales volumes. ZTF expects further positive momentum in sales with improving economic conditions and a strong order book. The stock made a 52-week high and low of GBX 499.00 and GBX 351.13, respectively.Based on the strong revenue growth and profitability, increased dividend, improved market conditions, supported by the valuation conducted above, we have given a “HOLD” recommendation on Zotefoams PLC at the current market price of GBX 417.92 (as on 8 November 2021 at 08:06 AM GMT), with lower double-digit upside potential based on 29.37x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

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