James Faulkner’s small cap of the week is James Cropper

Paper business James Cropper (CRPR), one of my tips for the second half of 2014, has issued a strong set of interim results which showcase the firm’s move up the value chain. Although total sales dipped 5% to £40.1 million, EBITDA increased by 23% to £2.7 million, largely due to lower input costs and an enhanced product mix. 

The key to the firm’s transformation is the Technical Fibre Products division, which saw sales rise by 10% on the back of growth in defence, energy and consumer electronics markets. The firm’s push into new markets seems to be bearing fruit, with the company achieving its first sales into China and for a specific programme here in the UK in the wind turbine industry. The next step will be to double its current production capacity through the installation of a third manufacturing line based on the company’s current proprietary wet-laid technology.

Expected to be complete in summer 2015, the installation represents “the latest step in an accelerated programme of capacity and capability improvements for the company, facilitating an increase in capacity to support sales growth, enabling shorter lead times and providing the opportunity to access new markets for which current production constraints have been a limitation.”

Meanwhile, James Cropper Paper Products saw production efficiencies, product mix enhancements, and lower input costs combine to more than offset lower sale volumes during the period. In addition, gas prices have been favourable, and pulp substitution by fibre produced from the reclaimed fibre plant continues to mitigate the impact of pulp volatility. Sub-profitable lines have been discontinued, and the firm is making inroads into more higher value, niche areas. An example of this is the “Khora” digital inkjet product, a printable canvas that folds to form instant wall art. Khora was launched at the recent Photokina imaging fair in Cologne, and was well received as a true innovation in this sector, which is expected to compete strongly against the existing block canvas market.

Cropper is also working to increase exposure to the luxury packaging and food packaging markets, to which end it has developed a range of branded and stocked items. The firm’s new Coffee range utilises materials from Cropper’s pioneering reclaimed fibre facility, which was the first in the world to be able to recycle coffee cups. Papers in the Coffee range comprise of 50% reclaimed fibres (RCF) that were once ‘single use’ coffee cups.

What’s it worth?…

Taking the TFP business alone, house broker Westhouse expects divisional operating profit to rise from an estimated £1.3 million in FY14, to £2.3 million in FY15, £2.8 million in FY16, and £3.5 million in FY17, by which time operating margins are expected to have risen to 17.5% (from an estimated 9.8% in FY14). The firm is eyeing up numerous verticals to drive growth, including automotive, aerospace, medical and industrial. With the shares still trading on a very modest 12.6 times forecast earnings for the year to March 2015, I still believe the market has yet to fully appreciate the scale of the transformation taking hold here.