British Polythene Industries: Ending The Year On A Positive Note

In its year-end update, BPI (BPI.L) appears to have finished FY12 at or slightly above our estimate. As H1 matched the previous year, this suggests modest y-o-y progress in H2. Polymer price trends are still gently downwards in the concluding months of the year, although management remains alert to a possible uptick early in the new year. BPI has outperformed the market by c 10% ytd, but still sits on a modest rating.

Meeting original estimates despite market challenges
Compared to the 5% volume decline in H1, the Q3 update noted that volumes had been much closer y-o-y and this has continued so far in Q4. Silage product, which has experienced good sales again in FY12, is a less significant contributor at the year end and so it seems reasonable to conclude that there has been no further overall deterioration in other areas at the year end. A gentle easing in polymer prices has probably helped the overall trading environment. Interestingly, our current FY12 volume projection is 7% lower compared to the beginning of the year, but higher revenue and profit per tonne – in higher average polymer price conditions – have compensated for this, leaving overall estimates unchanged.

Continuing to invest and generate cash
FY12 has seen an increase in capex (to c £18m versus c £14m depreciation) as a number of new projects, including a new silage stretchwrap line in Zele and a new recycling plant at Rhymney, have been brought on stream. More is to come (eg new co-extrusion equipment in Sevenoaks) and, together with more efficient running elsewhere (eg the extra-wide film line at Ardeer), this spend should increasingly benefit FY13 and beyond. At the same time, BPI has been nudging up its ROCE to around the mid-teens level in what remain generally unhelpful market conditions. We expect BPI to continue to deliver debt reduction year-on-year, although sustaining the £23m seen at the interim stage (versus £31m at the start of the year) would be a challenge in our view.

Valuation: Low rating despite business improvement
BPI’s share price has traded between 375-395p since the Q3 update on 6 November and currently sits in the middle of that range. The closing-year PER stands at just 7.5x with EV/EBITDA at 3.6x and, on our estimates, the four-times covered DPS gives a 3.4% yield. This gives little credit for the business investment and improvement undertaken in the last three years in difficult market conditions. Driving returns ahead and generating cash will continue to endorse these actions ahead of a more demonstrable increase in profitability to be driven, at some point, by rising volumes.

To Read the Entire Report Please Click on the pdf File Below.