FY16 has been a disappointing one for Essentra PLC (LON:ESNT), but a new CEO is a catalyst for change. Having clearly identified some key issues, short-term remedial action is to be followed by a full strategic update later in the year. The near-term goal is to deliver more robust operational performance before driving profitable growth thereafter. FY16 results are scheduled for 17 February.
Plain-talking, clear thinking
A 23 January IMS highlighted underperformance in the Health & Personal Care Packaging (HPC) segment leading to a likely FY16 outturn around the lower end of market expectations. The profile of profitability (FY15a to FY17e consensus estimates) tells its own story and on a conference call, new CEO Paul Forman (formerly Coats Group CEO) pulled few punches. The call highlighted a series of causal factors (relating to business control, acquisition integration and senior staff churn) resulting in some loss of market position. The clear message was that the issues are self-inflicted/internal and, hence, can be rectified but also that the fix is not an instant/overnight one. The primary near-term focus is likely to be addressing underperformance in HPC, but a group-wide strategic review is now underway.
Plotting the way forward
Essentra is a complex business with a range of manufacturing technologies, products, end-markets and geographies served. Increasing management process rigour – at group and divisional level – will initially aim to bring greater stability to functional and operational performance and form the basis for progress thereafter. The starting point is a c £1bn turnover business that has previously reported mid- to high teens operating margins. There will be exceptional (cash and non-cash) costs, the extent of which are still to emerge. An initial take will come with FY16 results on 17 February and the second phase with the strategic review update on 28 July (with H117 results). This will be pivotal to future group direction. We believe that Essentra has the financial capacity to sustain the FY15 dividend payout level although, with contracting earnings cover in prospect, this will come under scrutiny.
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