Q1 19 revenues dominated by high comps and successful acquisitions.
The solid +11.3% increase in gross terms was brought down by a disappointing -4.6% contraction on a lfl basis. As Chargeurs strives to promote its keen eye for profitable growth, organic or acquired, it is only fair to promote the reported figures as satisfactory and reminding shareholders that the 2018 base was noteworthy for being remarkably high.
Revenues from its largest business, Protective Films, shrank by -9.5% lfl due to this Q1 18 high base and clearly to a less favourable economic environment in Europe and a stalling in orders from China, as clients await the implementation of a lower VAT rate in Q2. It is evident that the slowdown in the European economy, notably in Germany, has caught up with Chargeurs as manufacturers postpone/reduce their orders, bracing for tougher times ahead. Caution is extending into Q2 as well. At the margin, the group has been preparing for the launch of additional capacity aimed at the premium market and to open by H2 of this year. This should help pull up sales somewhat and help defend margins. In broad terms, H1 in Protective Films suffers more from flat demand than from any pricing pressure.
The group can smile when it comes to Fashion Technologies that manages a lfl gain of +2.4% and a big jump with the integration of PCC acquired last summer. The combined businesses are up to expectations when it comes to synergies, to servicing the fashion and luxury industries with worldwide assets and expanding in Asia. As a reminder, it was not a foregone conclusion to relaunch the then staid interlining business as Chargeurs did through repositioning and acquisitions. Fashion Technologies has the potential to become the second driving force for Chargeurs, which vindicates its disciplined acquisition strategy.
Concerning the smaller Technical Substrates business, it is important to note that it can record big quarterly swings depending on deliveries. So that the quarterly lfl drop is not an issue.
In all, the integration of recent acquisitions in Technical Substrates (UK-based Leach) and Fashion Technologies (Asia-based PCC Interlining) resulted in a +15% scope effect in group revenues. In order to continue with the group’s active external growth strategy, the renegotiation of the terms of its Euro PP notes issued in 2016 and 2017 to align those with the more favourable ones of a biggish syndicated loan will give the company extra firepower to chase large, high value-added acquisitions to continue strengthening its portfolio as it aims to reach €1bn in sales by the end of 2021. This renegotiation clearly attests to the confidence that creditors have in the ability of Chargeurs to deploy successfully its growth ambitions.
Despite a (well-flagged) challenging first quarter in lfl terms, the company reiterated its outlook for FY19.
We will make slight adjustments to our estimates, taking into account the more challenging context for the Protective Films division over H1. This should have a marginal impact on our target price which is dominated by a SOTP which itself is hardly impacted by quarterly revenues. We maintain our positive view on the stock.
