MPAC – H1 2020 Update

MPAC makes packaging machinery. I have written about them extensively in the past, but was consistently too pessimistic until finally buying in January.

MPAC went into the COVID-19 crisis with very strong business and share price momentum. A strong full-year trading update, the delayed effect of a number of earlier positive statements, and a strong wider market pushed the share price from 168p at the start of December to peaks of 367p in February. Like many shares that had seen a strong run, they they then halved in the depths of mid-March. This volatility is not unusual for MPAC, as this graph shows:

Stockopedia, 5 year, logarithmic scale

While the bulk of MPAC’s business is in the defensive food and medical sectors, they are nonetheless mostly reliant on their clients’ capital expenditure for their revenue. And as we have seen with Medica, COVID-19 has had the counter intuitive of reducing activity in some areas of healthcare. Therefore it is understandable that MPAC has not regained its earlier highs.

Nonetheless In May they reported that they were able to remain open for business and that:

Cash generation in the first three months of the year was in line with management expectations prior to the pandemic.

This was not surprising as many countries had only started to respond to the health crisis at the end of March, and with trade receivables running at about 66 days of turnover, it is unlikely that any of the expected cash receipts in the period would be affected.

Today they issued a more detailed update covering the H1 to 30th June 2020. There is lots of positive detail in there such as their ability to work remotely which should result in benefits that persist after the coronavirus outbreak is over. However, the key statements in my mind are:

Global travel restrictions have had an impact on the timing of new original equipment orders, project execution and on-site service revenues.

Our order book going into the second half of 2020 of £45.4m remains strong (30 June 2019: £39.9m) and to date, no orders have been cancelled due to COVID-19.

It is pretty clear from the above that some orders will slip from H1 to H2 (and likewise some of the cash from existing orders). In that context an increased order book for H2 would be expected and is not any indication of resilience or underlying growth. The order book is also down from the £52.2m at the end of December.

On the outlook side they also say:

Pleasingly, our customers remain active and we continue to win original equipment and service orders with noticeable resilience in the Healthcare sector and in the Americas region.

As mentioned above, I had concerns over the heathcare sector, but it seems the particular products they package have held up well and should continue to do so. The strength of the Americas is less reassuring as this may relate to the failure of much of the region to properly lock down – they may not have seen the worst here.

Although this is something they have been working hard on, the fundamental issue with the company remains the limited level of recurring revenues and visibility beyond the orderbook. In the current circumstances with additional lockdowns in many parts of the world, additional delays to orders seems inevitable.

Broker Estimates and Interview

The broker update (by Equity Development / Paul Hill) guesstimates that H1 2020 will be down 20-25% on H1 2019 which would be a large fall for a company previously enjoying such strong momentum.

The related video states that revenue for H1 is down 25% on previous expectations. Broker consensus for the full year was for £95m of revenue up from £89m, so assuming the same H1/H2 split, that equates to 20% down on last year and about £36.5m in H1 and £71.3m for the full year.

The whole of the video is well worth watching, in particular the suggestions that they may get a slice of the coronavirus medical packaging market, and I have commented elsewhere that there is an increased demand for food packaging with less being distributed through foodservice outlets and more via supermarkets.

Outlook and Conclusion

The earlier £95m forecast for 2020 looked very conservative given the £89m in 2019 when Lambert was not acquired until part-way through H1. Even assuming a repeat of the previous year’s cum-Lambert performance they should have turned over £98m. Therefore the following numbers may start from an overly pessimistic starting point. But, nonetheless, on the basis of £71.3m for the full year, I see a small operating loss, with breakeven on their adjusted (pre pension admin and acquired intangibles) level.

However cost saving measures may well improve on this and I think FY Revenue of £71.3 is unduly pessimistic and in reality I expect profitability to continue, albeit at a fraction of current levels.

Today’s update did not appear to be a cause for the celebration implied by the share price rise and so I cut back my position slightly first thing.

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