Essentra PLC (LON:ESNT): A new CEO-led corporate recovery programme is underway and many key ingredients to achieve this are visible. Acknowledging lower FY17e earnings, clearer strategic direction and turnaround indicators should be more tangible from H2. We expect positive newsflow to gather momentum.
Earnings under pressure, dividend maintained
FY16 saw lower reported profit and margins in all three divisions, despite FX tailwinds. Group operating profit came in at £131.9m, in line with the 23 January update (and below November guidance of £137-142m). The trading result was largely attributable to internal inefficiencies, while underlying markets were largely satisfactory. While there were some signs of performance improving in H2, Health & Personal Care Packaging (HPC) was still deteriorating at the year-end (and so far into FY17). An HPC business unit review resulted in a c £124m intangible impairment charge (c 26% of end FY15 carrying values, 40%+ of net Clondalkin consideration). More positively, DPS was maintained at FY15 levels (covered 1.4x); cover will narrow further in FY17, but our sense is that it can be held again.
Calm balance sheet to facilitate new strategy
Year-end net debt of £379m will fall to a pro forma c £170m (gross c £230m) after the Porous Technologies disposal in Q117, which is c 1.4x continuing EBITDA. This leaves plenty of headroom within a £270m and €168m RCF (to 2019). It is early days strategically, but initial signs are that major surgery is not expected; each division is considered to have market presence and the potential to reach previous peak margins (group ROS 17%+). H117 results (28 July) will give a fuller strategy update, but one marker is for business stability (in group, operational and financial processes) to be achieved in 12 months. Exceptional cash costs (eg corporate reorganisation, footprint changes, consultancy fees) are impossible to quantify at this stage; we consider that c £10m pa for a couple of years could be comfortably accommodated (although cash dividend cover needs to be monitored). We estimate that this would maintain net debt around the indicated pro forma level.
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