Macfarlane Group – its resilience is shining through

Mark Watson-Mitchell believes that a company like the Macfarlane Group will weather all its storms and come out stronger on the other side.

On Monday this Glasgow-based packaging group informed its shareholders that it has done better than expected during the Covid-19 crisis.

Way back in 1949, Norman Macfarlane used his £200 army gratuity and set up a small operation supplying stationery to local businesses in Glasgow.

The ethos that he created, “commitment to our customers is paramount”, has persisted from the early days right up to today.

Some 70 years later the Macfarlane Group (LON:MACF) now employs over 925 people across its 31 sites. It principally operates in the UK but also has businesses in Ireland and Sweden.

The group, which has over 15,000 customers, handles over 50,000 deliveries per month, using its fleet of 100 delivery vehicles. It offers thousands of packaging stock lines and has a network of strategic suppliers.

It designs, manufactures and distributes protective packaging products and labels supporting industrial and retail businesses in the UK, Europe and the USA.

Its businesses are: Macfarlane Packaging, which is the leading UK distributor of a comprehensive range of protective packaging; Macfarlane Labels, which designs and prints high quality self-adhesive and resealable labels, principally for fast-moving consumer goods companies; and Macfarlane Packaging Design and Manufacture, which designs and produces protective packaging for high value, fragile products.

The company provides over 600,000 lines to a wide range of industry sectors including consumer goods, food manufacturing, logistics, internet retail, mail order, defence and aerospace.

The year to end-December 2019 saw the group report turnover up 4% at £225.4m, while pre-tax profits were up 10% at £12m, with earnings coming in at 6.17p per share.

The results marked the tenth year of consecutive profit growth. Net debt was down £0.5m to £12.7m, while the group’s pension deficit was also reduced, by some £3.3m to just £6.5m.

However, this current year will see those figures sliced drastically, but not as badly as at first estimated.

By its mid-May AGM, thoughts were that demand levels were going to be some 75% to 80% of those achieved in the second half of 2019. Net debt by then had come down even further, to below £6m. The company cancelled its final dividend for 2019, saving £2.8m.

On Monday of this week, when the company announced its trading update, it was a lot less pessimistic. Sales were so far only off 7% in the second quarter. All of the group’s sites had remained open and traded throughout the period.

Business from its customers in the auto, aerospace and high street retail sectors had been weak, but that slack was largely taken up by increased activity by its clients in the e-commerce, medical, food and household sectors.

Encouragingly net debt was down to just below £2m. Furthermore, the group was expecting to remain profitable, but no profit guidance was given, apart from indicating that it would operate well within its current borrowing facility.

There are 157.8m shares in issue, of which the board own about 12.4% of the equity.

Leading institutional holders include Rights & Issues Investment (10.9%), Canaccord Genuity Wealth (10.8%), Otus Capital (6.28%), Macfarlane Group UK (5.76%), Miton Asset (4.91%), BGF Investment (4.06%), Rathbone Investment (3.72%), Schroder Investment (3.01%), Unicorn Asset (2.70%) and BlackRock Investment (2.44%).

We should be getting a very much clearer statement on the first half trading and how the current year might pan out on Thursday 27 August, when the interims are published.

So where does that leave the shares?

Well, I believe that a company like the Macfarlane Group will weather all its storms and come out stronger on the other side. It has a certain long-term resilience and that is so important. And remember its “customers” ethos, that will drive them through the next 70 years.

Its shares have been up to 116.5p and as low as 61p in the last year, with its peak in late January and its depth scored in late March.

Today they trade at around the 77p level. It may take a while for them to show their bounce, but I am sure that it will shine through in the price.

Ahead of next month’s interims I now set a target price of 100p.