British Polythene Industries FY12 Results

British Polythene Industries (BPI) delivered a good, well-rounded FY12 performance with most headline metrics ahead of our expected levels. A strong UK performance and cash management in particular caught the eye. Moreover, flagged ongoing investment intentions across the group indicate that additional market opportunities are being sought. BPI’s share price has performed well and post-results upgrades support this. The rating has expanded a little, but does not yet reflect the more growth-oriented outlook comments.

Broadly Based Progress
While FY12 revenue was down and just below our estimate (chiefly lower European volume and FX), operating profit was ahead, with the two largest regions performing well. After lower interest costs (and a cash-neutral H2), PBT of £20.4m (+6.7% y-o-y) was £1.3m higher than we expected. The seasonally more important H1 period was in line with the previous year, so this progress was generated in H2 (rising, to c 34% of operating profit vs c 30% in FY11). Lastly, BPI proposed a final dividend increase slightly faster than the interim stage (+5.6% overall), well covered by earnings.

More Investment And Profit Growth To come
Capex spend has ticked up in the last couple of years (1.1x and 1.4x depreciation in FY11 and FY12 respectively) in support of product development into higher value-added film lines. Agriculture has been a significant beneficiary to date, both in Europe and UK/Ireland, together with recycling/refuse and certain consumer products. This has complemented site rationalisation in the UK and together these actions have raised group ROCE to c 16.8%. Management is flagging further significant expansionary capex spend (at c £20m pa versus c £12m depreciation currently) to drive further incremental profit growth.

Valuation: P/E 9x Despite Out-Performance
Market challenges still exist, but BPI is moving ahead on a number of fronts and we have raised earnings estimates by c 6% in underlying terms. These estimates are struck at £/€ 1.20; further sterling weakness may increase UK polymer costs (with higher euro debt translation), but would also be a net positive for earnings given that almost 60% of FY12 operating profit was generated in Europe. BPI’s share price has performed well this year (+ 17% ytd) including relative out-performance of c 20% since the end of January. Despite this, the FY13 P/E is still just 9x. Our current estimates beyond this point to mid-single-digit EPS growth, although the investment programme coupled with some economic recovery is capable of enhancing it. BPI also offers a very secure yield (2.6% historic) and growing dividend payout.

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