If you are into high price earnings, market leading growth stocks then take a look at Zotefoams, writes Mark Watson-Mitchell.
Over the last 98 years, the innovation legacy of this pioneer in cellular materials has led to it now claiming to be the world’s largest manufacturer of lightweight cross-linked polyolefin block foams.
Zotefoams’ (LON:ZOTE) products and technologies, which are based around unique and environmentally friendly processes, include the AZOTE® and technically advanced ZOTEK® andT-FIT® ranges of closed-cell foams, which are said to be superior in strength, consistency, quality and purity to foams produced by any other method.
MuCell® is a patented microcellular foaming technology for extrusion that delivers both cost and environmental benefits by reducing the plastic content of common products by around 15%. MuCell Extrusion Technology LLC, 100% owned by Zotefoams, licenses this technology and has installed equipment at customers in over 30 countries.
The key to Zotefoams’ manufacturing process is the ability to create a uniform cell structure with regular cell wells, giving the foam a ‘mechanical strength’. Techniques that do not have a uniform cell structure are said to be more susceptible to tearing, compression and tensile issues.
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The other major advantage of the company’s process is that it uses nitrogen – which is an odourless, tasteless and mostly inert gas, whereas other processes use chloro fluoro compounds or other volatile gases, which are not particularly friendly to the environment.
The basis of the company’s unique technology involves dissolving nitrogen gas into a plastic sheet at extreme pressures and temperatures, which on release increases in volume to such an extent that it expands the plastic into a foam.
As an example, in automotive applications, its foams have among the lowest fogging values in the industry. Fogging is the mist that forms on the inside of your car windscreen over time and is attributable to volatiles in the plastics used in the car interior. BMW, Daimler-Benz and Toyata are among Zotefoams’ leading motor manufacturing customers.
In medical applications the purity is of great benefit for obvious reasons; and in packaging of valuable or rare artwork the company’s products have ensured safe transport and storage for many of its users, including the Natural History Museum and the British Museum.
Unilever, the consumer products giant, is using the company’s technology, as another example, to reduce the amount of plastic that is used in its Dove branded body wash containers.
Worldwide its productsare used extensively across a range of markets including automotive, aerospace, product protection, industrial parts, marine, building and construction, military, medical and sports and leisure.
It operates two foam manufacturing sites, the first is in Croydon and the second is over in the States, in Kentucky. It also has a foam conversion site in Oklahoma, whilst it also licenses its technology from a base in Massachusetts.
In Jiangsu Province in China the company owns a foam conversion site that manufactures and sells T-FIT® advanced insulation products. In Hong Kong the company operates a sales joint venture for AZOTE® foams into the Asian markets. Recent heavy capital expenditure has been spent on a third foam-manufacturing site, which is planned to begin operations in Poland next year.
The company’s declared strategy is to be the world leader in cellular materials technology in its chosen markets, whilst delivering shareholder value by using unique technology to create a portfolio of differentiated products. It intends to develop its business through sustained high levels of organic growth and, where appropriate, through partnerships or acquisitions.
Over the last five years the group’s revenues have grown steadily from £49.08m in 2014 to £81.04m for the year to end December 2018. In that same period pre-tax profits grew progressively from £4.01m to £9.86m last year. Earnings per share have advanced each year since 2014 from 10.70p to 18.66p in 2018.
And a quick study of its dividend growth shows a certain corporate modesty as it retains as much of its cash to fund its international development. Rising almost 0.15p per year from the 5.45p in 2014 to just 6.12p last year.
A month ago, at the group’s AGM, its chairman Steve Good told shareholders that there had been strong growth in the first four months of the current year. It benefited from currency tailwinds and, in the UK and continental European polyolefin foams market, some inventory build relating to Brexit.
After the strong start to the year the company anticipates a return to trendline growth rates, with a reversal of the inventory build in polyolefin foams and more demanding prior year comparatives in its high-performance products.
He also declared that despite the less stable political and macroeconomic environment, the company expects to be able to meet market expectations for growth for the full year. It also remains confident about the long-term prospects of the business.
Looking at broker estimates for the current year suggests that revenue of around £91m is possible, upon which about £12.60m pre-tax profits should push earnings out at 20.8p and with another meagre dividend advance to just 6.34p per share.
Next year £103m of sales could see profits of around £15.30m, earnings of 25.32p and a dividend of 6.57p per share. Estimates for the 2021 year are for £112m of sales, pre-tax profits of £17m, some 30p of earnings and a 6.80p per share in dividends.
Leading institutions own well over 60% of its 48.3m shares in issue, capitalising the company at around £300m.
With its shares trading at around 600p they are trading on a whopping 30 times current year p/e and yielding just over 1% – certainly a rating that I would not normally recommend to investors. However, I do consider that Zotefoams is a market leader well worth backing. It has loads of growth to come and its shares look destined to see 750p within the next year or so.