The H1 14 earnings point towards solid margin expansion in the Protective Films division while the other main business Interlining more than resisted on an operational basis although it has been clubbed by the Argentine peso sliding down the drain. The drive for a debt-free balance sheet has been continuing even though the group now feels strong enough to buy back externalised production assets.
The Protective Films business is firing on all cylinders and confirms its current stand as the group’s earnings driver with a 7.8% gain in revenues (impressive in a flat European GDP context) and a 72% gain at the EBIT level. This implies an 8.5% EBIT margin where our annual expectation was 6.2%. The business is not seasonal but obviously slower in August and December. Still, H2 margins may just happen to keep the high levels reached over H1 as the volume gains pay off in terms of capacity usage. Even though there is a recovery dimension, the operational leverage of stronger volumes is surprisingly high at close to 9x (+72%/+8%). Confidence in the division’s profitability has led the company to take full ownership of its production tools. This has already impacted the margins by H1 (lower leasing charges, although the group has to pay for the implied interest charge below the line).
The Protective Films business seems to be gaining market share in a context of slow growth. The unit’s continuing work to focus on niche markets appears to be paying off.
In its own way, the still battling Interlining division has delivered handsomely with flat revenues lfl (down 5.4% due to the Argentine peso) and EBIT up 40%, if one does not allow for last year’s capital gain on disposals. This is commendable. Some of “Interlining” businesses also appear to have in their pipeline interesting and promising opportunities into technical textiles, streets away from the gloom that affects the clothing industries.
Finally the Wool business, turned into a capital-light service business, has not only improved its revenues by 3.3% but also confirmed its EBIT (€1.5m, 2.7% margins) which are better appreciated as a decent return on capital employed.
This divisional progress is positive news. The group indicated a €470m revenue target for this year (we use €475m) and a €19m EBIT (we use €20.5m). Our optimism at this juncture is justified by the confidence that seems to be pervading the group for the next few years.
This is also implied in the decision to buy back rented production assets against a €12.6m consideration. The net debt situation by late June 2014 is thus a marginal net cash position that would have been €13m without the decision to buy back industrial assets. This strong balance sheet is an excellent starting point to invest for growth in the two main industrial businesses.
The earnings are very satisfactory. The businesses are running healthily even in adverse macro conditions. We were a bit ahead of the game before the H1 earnings and thus only marginally tweak our forecasts. However the breakdown of contributions is substantially modified to allow for the strong run of the Protective Films business while we were clearly too optimistic on the Interlining one. Separately, it is important to pinpoint that the AlphaValue EPSs are always fully diluted ones, i.e. we assume that the last convertibles will be exchanged at maturity (2016) and not bought back.
