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Plastics Capital Trading Statement: Buy

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I commented positively on shares in AIM-listed niche plastics products manufacturer, Plastics Capital (LSE:PLA) in September at 66p and November at 72p. Following a trading update today which reported that the company “continues to trade broadly in line with market expectations” and that “performance should be broadly in line with expectations over the final quarter and looking into the next financial year anticipate a year of significant progress”, the shares now trade at 79.5p. The following reviews today’s announcement and offers my remoulded take on the shares (that is a bad pun BTW)

To read my September and November pieces click here and here

Unsurprisingly demand in Europe is noted to remain “depressed”, though sales elsewhere are growing in-line with management expectations – approximately 65% of group sales being exported to more than 80 countries worldwide. Margins and cash generated from operations are noted to “remain strong and… similar to last year”, allowing continued investment for future growth. This includes the establishment of a manufacturing facility in Shanghai, China, due to be ready for production in July and a new production line for industrial films due to go live in May. The former, in creating a ‘local’ manufacturing presence, will enable the group to tap into the significant Chinese market for plastic ball bearings – with the company anticipating sales to Chinese customers growing by more than £1 million over the next 3 financial years, whilst the latter “will reduce production costs, enable the introduction of new products and increase the production capacity of this business area by approximately 20%”.

Meanwhile the group has continued to secure significant new business wins – including a first project (paper pathway bearings) for a new key account, LG in South Korea, with potential sales of £0.25 million per annum and to go into production later this year and a second project in the camera lens bearing market.

For its year ended 31st March 2012 Plastics reported revenue of £32.1 million and results for the six months ended 30th September 2012 showed revenue 3.3% lower than at the corresponding prior year stage, though still facilitating a £1.54 million reduction in net debt over the half year to end that period at £8.61 million. A doubling of the interim dividend reflected the company’s confidence in its cash generation – with, primarily from operating cash flow, the debt position having been consistently reduced since reaching £19.59 million at 31st March 2009.

The negative market perception of material debt in the current strained economic times has clearly held the share price back here but as the business continues to shows its resilience, market sentiment towards it looks to be continuing to improve – 79.5p representing a more than 9.5% share price increase on the back of today’s announcement.

However, as per my September and November pieces, I continue to believe a share price in excess of 100p a realistic target here. There is no doubt that the macro economic climate is not making life easy for the company but, with its competitiveness underpinned by significant engineering know-how and automation, I believe it will continue to churn out a decent return for investors who appreciate that it is typically such concerns – instead of the likes of blue sky oil exploration piffle – which are sexy when it comes to stock market returns.

Between 2000 and September 2012 Tom Winnifrith edited t1ps, the website he founded. HIS record over 241 share tips was an average gain per tip of 42.7%. Tom Winnifrith now produces the Nifty Fifty website which served up one new recommendation a week covering growth, income, penny, recovery and gold shares. For more details or to join ahead of this week’s hot share tip click HERE

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