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Zotefoams: Nitrogen filled uniform cell structures!

Last updated: 23:00 13 Nov 2007 GMT, First published: 00:00 14 Nov 2007 GMT

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Zotefoams is no Spring chicken, having first listed in 1995 and started trading at 170 pence. Back in the prehistoric times of the 1990's, Zotefoams was an exciting stock to be in, peaking at 340 pence in 1996 and bottoming out at just over 70 pence in 1999. Alas, the days of extreme volatility are gone; now investors have to make do with more meagre swings. For the last seven years, Zotefoams has spent the vast majority of its time trading between 70 pence and 110 pence - a 12 year chart shows a general downtrend in the shares from 1999 until 2005. But in the last two years that downward trend appears to have reversed

Zotefoams, as the name suggests, is in the foam business. The company is based in Croydon, but has a manufacturing facility in the US too. The company 'manufactures a range of closed cell cross-linked polyolefin foams' using a nitrogen expansion process. This process allows Zotefoams to produce a range of "high performance" foams that are tough, rigid and can withstand high temperatures, and have flame retardant and chemical resistive properties. The key to Zotefoams manufacturing process is the ability to create a uniform cell structure with regular cell wells, giving the foam a 'mechanical strength'; techniques that do not have a uniform cell structure are more susceptible to tearing, compression and tensile issues. The other major advantage of Zotefoams' process is that it uses nitrogen - an odourless, tasteless and mostly inert gas ? whereas other processes use cloro fluoro compounds (CFC, HCFC) or other volatile gases which are not particularly friendly to the environment.

Over the years, Zotefoams has expanded into a number of markets where its foam has desirable qualities. The brand name is Azote® but there are four additional sub-brands using the same technique, but different polymers. The Azote family of products is used in everything from protective packaging, padding in protective sports equipment, and insulation and padding for building and automotive applications, to footwear, buoys, life jackets, prosthetics, other 'body moulding' techniques, and last, but certainly not least, in the commercial and military aviation sectors.

This wide range of applications and revenue generation certainly offers the group protection again contraction in any one particular market. The issue for Zotefoams is more about where it drives growth. Interim Results for the six months to 30 June 2007 are fairly pleasing to the eye. Profit before tax rose 18% to £1.8 million with gross margins increasing to 28.3% (2006: 26.8%), net debt shrunk slightly to £2.52 million while basic earnings per share leapt 55% to 4.5 pence. This allowed Zotefoams to maintain the interim dividend of 1.5p per share. High Performance Polymers, where margins are better, put in a particularly robust turn, seeing revenues increase by 61% to £0.427 million. Only group revenue growth was drab, coming in slightly lower at £15.65 million, but still in line with expectations.

Evosecurities, house broker and nominated advisor to Zotefoams has a 'reduce' recommendation with a price target of 100 pence. As Zotefoams is trading below 100 pence, one would think the house broker might consider getting off its backside and updating its advice on the stock. In the meantime, suffice to say that despite Evosecurities' "reduce" stance, it is bullish on the company's prospects for the future, but just felt the share price had got a bit ahead of itself. Guidance from the gurus at Evosecurities forecast sales increasing from £31 million to £34.1 million in 2008, with EBITDA of £6.1 million in 2007, rising to £6.5 million in 2008 putting the company on a 2007 profit to earnings ratio (P/E) of approximately 18 at a share price of 96p, falling to 15.7 in 2008. This doesn't appear to leave a huge amount of uplift in the share price, but with a dividend yielding in the range of 4%, there is more to this stock than simply share price gains.

Since the interim results, the company has announced a marketing alliance with NASDAQ listed UFP Technologies (NASDAQ: UFPT) to target high performance, advanced insulation systems for the biotechnology and semi-conductor markets. The partnership will launch T-Tubes®, an insulation system for stainless steel process lines. Since announcing, the new product has passed Cleanroom Materials Flammability Test Protocol from FM Global - a certification recognised by insurance companies in the US. Perhaps the most positive news of all, however, was announced last week: Nigel Howard (Non-Executive Chairman) and David Stirling (Managing Director) collectively acquired 28,619 shares at between 96 and 99 pence. That was enough to give the share a kick up the backside, and enough to give us a kick up the backside and finally take a closer look at the company.

Arguably, the biggest risk to Zotefoams is its need to continue to seek new areas of growth in order to maintain revenue and earnings per share momentum. This has meant more and more commitment to the US market, which in turn exposes it to a specific currency risk.

It's hard to get really excited about Zotefoams ? but it is a UK based, low debt, cash flow positive, dividend paying company operating an established business with a decent track record of earnings - not a lot of AIM companies can boast about that.


Links

UFP Technologies
www.ufpt.com

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