Cash-strapped shoppers are increasingly plumping for cheaper own-label products. Consumer research house Kantar Worldpanel says the UK market for them is expanding by 9.3% a year. That’s bad news perhaps for the likes of Unilever, Reckitts and P&G, but it’s happy days for McBride.
The firm is Europe’s largest supplier of own-label household (80% sales) and personal care (20%) products, such as detergents, mouthwash, toothpaste and shampoo. It supplies 95% of the continent’s top 50 retailers including Auchan, Carrefour, Tesco, Metro, Aldi, Wal-Mart and Sainsbury’s.
It is the number one player in Britain, France, Italy and Poland; differentiating itself from private label rivals by focusing on new product development, supported by 200 scientists and technical experts located in its global R&D centres.
However, a recent surge in ethylene costs seems to have crimped margins in the January to March period. And fighting for profitable shelf-space is never an easy task, given stiff competition and a reluctance on the part of supermarkets to accept price increases.
McBride (LSE: MCB)
Nonetheless, in April CEO Chris Bull confirmed that although the “trading environment remained challenging” quarterly sales were up an encouraging 3%, and the company’s supply chain restructuring initiatives are on track to deliver £7m of annualised savings. It has closed factories in the UK and Italy, and invested instead in sites across central Europe and Asia.
Consequently, with raw material costs easing of late, and lower commodity prices expected to feed through to profits, near-term prospects look bright. Consensus City estimates are for turnover and underlying earnings per share to come in at £824m and 9.3p respectively for the year ending June, jumping to £844m and 13.1p in 2013.
I rate the stock on a through-cycle EBITA multiple of ten, based on sustainable profit margins of 5% being achieved by next year. After deducting net debt of £85.2m (1.9 x EBITDA) and a £17.1m pension deficit, then discounting back at 12%, I get an intrinsic worth of 150p per share.
Rating: SPECULATIVE BUY at 115p (market capitalisation £210m)