TODAY’S UPDATE
Plastics Capital (PLA.LON) has published a trading update for the financial year ended March 2017, ahead of full results expected at the start of July. We believe the statement confirms that company will report solid earnings growth y/o/y and strong progress in the overall business plan.
By our analysis, organic revenue growth has run ahead of market expectations, but EPS for Mar2017 and Mar2018e is now 3-4% lower than previous expectations, reflecting cost investments to support the growing project pipeline as well as restructuring costs relating to the previously disclosed issues at the Palagan polyethylene films business.
OUR FORECASTS
We are now forecasting revenues of £66m and £75m for Mar2017e and Mar2018e respectively. There is an increase of around £7.5m each year due to an accounting change in consolidation, but even on a like-for-like basis we believe that consensus could be increased now by £1m and £5m for 17e and 18e respectively.
At the EPS level we are now forecasting 11.5p and 12.5p for Mar17e and Mar18e respectively, which we believe is 4% below the previous market expectation for both years, reflecting the cost investments and the Palagan issue. We would argue that investors should pay particular attention to the cost investment side of this, as there are significant positive implication for FY Mar2019e and beyond.
LOOKING AHEAD – SOME SIGNIFICANT POSITIVES
Two big positive stand for us on a medium term view. Firstly we believe that the company will report a growing pipeline of new projects won but not commenced. Whilst this weighs on margins short-term, the return on this cost investment should continue for years to come.
Secondly, the benefit of weaker £GB is not reflected in Mar18e earnings, due to hedging. As the hedging rolls off, we believe there is an earnings tailwind of more than 15% EPS, starting from FY Mar19e.
VALUATION
On our Mar2018e forecast, the shares now trade on 9.8x P/E (April 28th closing price). Allowing for the 2019/2020 FX tailwind, and the accelerating organic revenue growth, one could reasonably argue for a 12x multiple as FY 2018e proceeds. This would imply a share price of 150p, 23% upside from the last closing price.