Accrol Group – Falling knife or recovery play?

4 mins. to read
Accrol Group – Falling knife or recovery play?

‘It never pays to trade backwards’ – just another market adage! And for investors in some shares, looking to past form can certainly be very painful.

Just imagine how those unlucky punters must feel when they look back on their investment in the shares of Accrol Group Holdings (LON:ACRL). They were plugged in by way of an AIM Admission Placing of 43.3m shares as additional working capital for the company, together with a massive vendor placing of 20.2m shares from existing shareholders – all at 100p per share. That valued the company at £93m.

That was in June 2016 – during a year that had seen pre-tax profits of £6.98m replacing losses of £0.35m for the year to end April 2015. That result was achieved on revenue of £118m against £82m previously. The following year end in 2017 saw sales revenue move forward to £134m and profits come in a little higher at £8.56m.

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It was only in the last twelve months or so that all hell seems to have broken loose at the company. In March last year, the group announced that its trading performance in FY18 was significantly impacted by three major issues, namely an escalation in internal costs, input costs and adverse foreign exchange hedging.

Although sales rose to £139.7m it scored a mega-loss of £24.07m, with its shares falling to a low of 6p at their worst – only to back up to 11p two months later. Then in May last year the company was bailed out by a £2m Open Offer and £8m Placing at 15p per share, all to boost its depleted working capital.

Established in 1993, Accrol is one of Europe’s largest independent soft tissue converters with manufacturing capacity in excess of over 100,000 tonnes per annum. It manufactures toilet rolls, kitchen rolls, facial tissues and away-from-home products to supply retailers throughout the UK. The company imports parent reels from around the world and converts them into finished goods at its 350,000 sq. ft. manufacturing, storage and distribution facility in Blackburn, Lancashire. The company currently manufactures approximately 17m units per week and supplies some of the UK’s largest retailers.

In the UK Accrol is recognised as a key supplier of both branded and private label kitchen and toilet tissue paper products to major suppliers in the Household sector. It has an established market position and its key strategic priority is to focus on the attractive, growing and profitable markets. Its market share position in the discount sector is particularly favourable, as the business grows on the back of its customers’ own growth.

At the time of the £10m refunding in May last year the Board believed that they could strengthen the company’s customer offering further: by extending its practice of securing longer terms contracts; by including indexation in its customer agreements where appropriate, discussions for which were then progressing; and by increasing its portfolio of products to include pocket packs, nappies and feminine products.

The company also took a number of measures to reign itself back and better control cost. It got out of its Skelmersdale central distribution centre, saving some £5m annually. It cut back the number of SKU’s (stock keeping units) from circa 500 down to less than 130. It also agreed a sole distribution agreement with one of its major suppliers for one of its UK consumer products, with other similar negotiations underway. Alongside this, the company also agreed a £16m revolving credit facility, good until 2021, as well as a £23m invoice discounting facility. Lease financing was also being arranged for the company’s new tissue line in Leyland.

Although it is some three months behind its schedule for the required turnaround, it is on the ‘recovery tack’. It will take some time to implement fully but it is good to note that the company’s productivity since September last year has improved a significant 76%. Accrol remains the largest independent supplier of toilet roll and kitchen towel in the UK, supplying three of the top four retailers and all the major discounters. The business is in a strong position to deliver further growth, profitably, in the UK market.

Following the dramatic transformation of the business last year the company expects to return to profitability at the adjusted EBITDA level in the year to 30 April 2019 and views the future with confidence. As far as I am concerned it would be rash to make any profit estimates for the next year or two. However, I do feel that this company has, hopefully, gone through its worst. It has made severe cuts and is consolidating at its low points. Sales look to be improving, albeit against a smaller product offer. If its finances stay strong enough it can pull itself out of its quagmire.

Its shares, which have been as high as 150p less than two years ago, are now at 22p, some 350% higher than last year’s low. At that level, while investors should be prepared to invest for the long haul, just a couple of items of good news could get the shares running again.

Another market adage is ‘never try to catch a falling knife’ – best to wait until it hits the floor and rest there before picking it up again. For Accrol, last year’s 6p low could well prove to have been the floor.

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