Cleaning product manufacturer McBride today announced a rather benign update in which rising costs were blamed for a fall in profits, which was estimated to be around 10-15% in the financial year. The markets reacted fairly badly to this, and in early trade the share price tumbled by 30%:
McBride is not a name familiar to most of the public. This is because they are a contract and private label manufacturer for cleaning and hygiene products. Things such as supermarket own-brand laundry and dishwasher tablets and other cleaning products would fall under this remit.
The markets that McBride cover are vast: not just the UK, but all over Europe. The scale of this therefore is immense, with hundreds, if not thousands of lines being made for different retailers. Demand for these products seem secure, and in the case of a larger economic downturn may actually increase, as a switch from branded to generic for consumers may be easier to accept for some of these products, than for example other types of supermarket goods such as food.
It should be said that in recent times, McBride has found it tough going. 2018 saw the share price hit 230p, but since then it’s all been downhill: poor performance and profit warnings have decimated the share price. It appears that today is simply another continuation of that trend.
The news gets off to a good start:
As announced in our trading update of 10 January, the Group achieved good sales growth in the first half period, with continuing underlying revenues, excluding the benefit of first quarter revenues from Danlind, up 6.0% on the prior year.
But then it gets worse after that:
However, the Group continues to see pressure on its cost base. We continue to expect the overall raw material pricing outlook to show improvements in the second half, but not to the extent anticipated in early January.
In addition, distribution costs continue to rise beyond our previous estimates due to market rates and efficiency challenges driven by logistics capacity shortfalls and internal service gaps. Accordingly, although the Group continues to anticipate further good sales growth in the second half year, the Board now expects full year adjusted profits before tax to be approximately 10% to 15% lower than the prior financial year1.
Checking the 10 January trading update, this pointed out that profits would be in line with expectations, so this seems to have changed rather rapidly.
The previous profits from 2018 were £36.2m, so 10-15% off this puts it in a rough region of £32m.
It is perhaps no surprise that McBride are pointing out the difficulties on its cost base: although most revenues are generated outside the UK, the impending Brexit may have adverse effects on logistics and extra red tape. With labour costs showing no signs of reducing, that places some strain on efficiency of operations.
Another thing that is obvious about the business is that margins are small: to get those £36.2m of adjusted profits, there was turnover of £755m. This is perhaps not much of a surprise, given that McBride make generic, non-branded products and they are to an extent a little vulnerable to the supermarkets: from the annual report it is shown that the top 10 customers account for 51% of sales: that is a fair amount of concentration.
The group is rapidly backing away from its aerosols business. The numbers tell the reason why:
One of the main bugbears was the level of debt in the company. As of the last year, this totalled £126m, which is many multiples of profits. There are two covenants, Net Debt/EBITDA and EBITDA/Net Interest, neither of which looks in danger of being breaches. The nature of these debts are mainly a revolving credit facility and also the use of invoice discounting. Debt has persisted and has actually increased here.
On the other hand, the balance sheet has some tangible backing: there is £46m worth of land and buildings and £84.2m worth of plant and equipment. So this should give lenders some comfort.
There is a decent sized pension liability at £42m – this requires a £3.0m payment per year. It is obvious from the cashflow that a lot of things are going on. The previous year, an acquisition was made which drained £35.7m from the company, although finance charges dropped greatly due to a refinance of debt.
Stockopedia rates this highly, giving it a rating of ‘Super Stock’ and a rank of 85.
Hard for me to get any more than lukewarm about this business. It has much in common with the supermarkets it provides: thin margins, and low working capital ratios. The reasons it points out behind the profit warning appear more structural than temporal in nature to me, and it seems difficult to reverse the trends behind it at the moment.
The level of debt is much in line with supermarkets, but I feel it should not be. The trouble is the level of cash generation here appears to be weak in the past: there seems to be differing reasons why it disappears, not least because it order to stay ahead, there is a decent level of capex needed.
The business also seems to have less power than its customers: they need them a little more. After all, a supermarket could just switch supplier to someone else, and there seems to be few other realistic distribution channels for these products: it is not as if they will be popping up in vending machines any time soon.
That said, demonstrably these products have demand, and in the scale that McBride produces may form its own type of competitive advantage, for it would be difficult for a new entrant to gain the same type of scale.
So on conventional metrics this appears to be fairly cheap. The current market cap is just £164.3m, which is around 5 times adjusted profits. The problem is that the adjustments strip out some costs that might be incurred in many years with the current outlook as it is. 2/5