The CEO who oversaw that sale was the current CEO Tony Steels, who was relatively new to the business having joined in June 2016. I believe the buyer approached Molins, but credit to Mr Steels for taking the opportunity and not trying to hold onto a larger empire.
I bought back into the business in 2018 when the market cap and cash on the balance sheet were both about £25m. I have been a gradual buyer ever since. Routine readers of my blogs will know I am a fan of cash. They may also note that in mid 2018 I was not particularly impressed by my perception of MPAC management’s control of the business. What a difference 18 months makes.
In March 2019 I wrote “I believe good management say what they are going to do, do it broadly to schedule, say they have done it and then say what they are going to do next. Great management do the above and they do it in a growth industry.
Over the last few years there has been little indication that MPAC has got the say-do mantra down pat, but this may now be changing.”
And today I have to admit that I was probably unfair and things have definitely changed. Bill Gates once wrote “that everyone overestimates what they can do in a year and underestimates what they can achieve in 5.” It has taken 3 years but Mr Steels has in my opinion changed the business and the management team and got it too the point where he has the saying doing mantra and has the following wind of being in a growth industry.
In May 2019 I put my business valuation after the Lambert Acquisition at £56.8m at the time the market cap was £35m.
At the time of writing the market cap is at £57.2m so based on what we knew before the results the company was in my opinion fully valued.
However with the full year results and accompanying presentations we have had some new useful information and reinforcement of previous messages.
The business has increased its revenue to £88.8m from £53.1m and delivered profit before tax of £5.4m.
The company produces an “underlying” profit figure but I think its largely hokum as it takes out costs that routinely have to be met (pension administration) or are related to profits that are not excluded (acquisition costs). So I work from the GAAP figures.
The company broadly sees the market as being for;
-Primary Packaging (Getting the initial customer product into a case – such as pills into a blister pack or a razor into the plastic case). Lambert is strong here.
-Secondary Packaging (Getting the primary packaging into a container – such as the blister pack strips into the carton or the razor into its sleeve). Langen is strong here.
-Tertiary Packaging (Getting the secondary packaging into a larger consignment/box for transportation – perhaps a pallet)
By acquiring Lambert MPAC can now offer almost a full stage 1 and 2 solution, which clearly is much more sales efficient as customers who need 1 part of the process usually needs the second.
Also adding to the sales efficiency is that Mr Steels has under the “One MPAC” banner pushed and organised the business to better deliver a Service offering. This is both a potential substantial boost to sales, but is also resource efficient as the sales person can sell the product at the same time as the equipment
The revenue of £88.8m comes from three sections.
Lambert – Margins circa 35%
Langen – Margins circa 22%
Service – Margins circa 36%
Because of the way the company gives the information I have had to make an informed assumption that £16m was due to Lambert of which £3m is now classified as Service. This is an 8 month figure So for next year all else being equal there should be an additional £8m from Lambert. At 35% margin we have an additional GP of £2.8m.
One of the points made by Mr Steels in his presentation is that the costs have gone up a lot, 40%+ in the last year. But this is not a reflection of the business levels but to provide a solid base for future growth. As such much of the underlying extra profit should fall through to the bottom line as costs will not increase anything like the same rate as sales for the next couple of years.
Service which represents currently 22% of the business is planned to be grown to 33% of the business. As such over time the business should see a margin enhancement from this of over 1.5%. It is not an overnight effect but along with a full year of Lambert should be materially earnings enhancing.
Alongside this two factors that have depressed results in the past are;
- Two legacy contract issues. Management confirms that these are now fully resolved and that the more significant customer that one of these related too has been very pleased by the response and additional work is expected.
- Since the Molins disposal there has been a lot of restructuring in the senior and secondary management teams. This has now come to an end and the team around him and at each operation is one that Mr Steels wants. This should help both on costs (no termination/recruitment fees) and on allowing greater focus on developing the business and sales pipeline both at the operational and senior management level as there is less need to focus on recruitment.
MPAC is a project based business, as such its results can be lumpy and customer specific. Much of 2019 was US (65%) centric and healthcare (74%) related. Particularly for Lambert (which is traditionally more focussed than Langen in healthcare). Going forward the food and beverage market, traditionally strong for Langen should take a larger proportion. In the near term America is likely to remain the key market. There has been for some time some demand for US manufacture an effect only increased since President Trump was elected. This aligns with poor European economic data and an Asian market that tends towards the cheapest source of automation supply whilst labour costs remain low.
The Coronavirus has had a limited impact to date, causing a delay in one project, but Orders are as expected YTD.
The starting Order book in 2019 was £53.1M against a starting Order Book in 2020 of £52.2m. Management think this is a significantly more diverse and as such stronger order book. I am a little concerned that these figures hide quite a loss in Orders. I assume on a conservative basis that Lambert brought in a substantial order book of its own. If this was only £10m and it may higher then this is a significant diminishment.
That being said the FD (Will Wilkins) reaffirmed previous guidance of a minimum 10% organic growth in sales (5% market growth + 5% improved sales effect) and throughout presentations made much of the “One MPAC” approach making sales more efficient and the settled management team as making sales more effective.
There remains some property that is surplus to requirements. MPAC have previously tried to get planning permission on the site but this was turned down. It is probable that in the next couple of years this will be reapplied for. I think it is fair to say that management see this currently as taking focus away from running the business but important enough to pursue when the time is more auspiscious.
Also to mention is that MPAC plans to reveal in May its 4.0 Internet of things offering. With the Lambert acquisition the data being across a much greater part of the process is likely to be that much more valuable and hence appealing to the potential customer base. Use of data and increasing automation will allow customers to significantly decrease the level of human intervention needed to rectify issues/errors. The actual product is not going to be available for delivery until year end but as it utilises already existing product management do not see delivery as an issue.
MPAC has also partnered with Siemens to offer a Digital Partner Platform. Whilst in part this offers a route for customer customisation into other processes I think the main thrust is to allow customers to model solutions before buying and implementation, so they can see the benefit that an MPAC solution will bring and configure for optimisation.
The Board has recommended a small dividend of 1.5p a share which it is hoped may make them attractive to some investors who cannot or will not invest in companies that do not pay a dividend. This is a very nominal amount so I have no strong opinion, but I do think this is a team proving themselves to be good capital allocators so I would be happy not to have a dividend.
Equity Developments are the house analyst and they give a 2020 forecast very similar to the 2019 results with significant growth in 2021. I recognise that they have access to information I do not so they may well be correct, but Coronavirus aside I think this is a little unfair. To be fair to them they do not act to provide a report to validate management and they have made the point that management do not seem to be acquiring shares in the market at what seems to be a low price.
The Company has cash of circa £18m and whilst there is an ongoing working capital effect this flows with projects and should not require substantially more funding.
As I think the company can now be expected to routinely deliver £7m PBT and that delivery should have a premium over prior valuations
Say £7m at 8 times = £56m + £18m cash = £74m
There are sensible valuations both above and below this but I see it for myself as being a reasonable base point, with Coronavirus excepted, a decent upside potential.
Current market Capitalisation is £54.5m so this is well within my margin of safety.
I may add going forward.