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Molins at 149p offer - worth at least 173.5p

By Tom Winnifrith | Saturday 8 July 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

We tipped these shares a couple of weeks ago at a 130p offer. Readers of the Nifty Fifty are thus happy bunnies as the shares are now 147p-149p. We do serve up good share tips and Steve and I are now working on our next one! But the shares should head higher still. I explain why in detail - here is our original tip from two weeks ago.

“Half-Year Trading Update” announcement yesterday from Molins (MLIN) included “in particular, order intake in the continuing group (i.e. excluding Instrumentation & Tobacco Machinery division) at the end of May 2017 was considerably ahead of order intake for the same period last year” – and has helped the shares up to a 125p offer price. However, this still does not look to reflect the potential value here following a transformational “Proposed sale of division” announcement earlier this month…

Operations: These comprise the design and manufacture of cartoning machinery, case packers, end-of-line and robotic packaging solutions (Langen) and a specialist engineering business developing technology and associated production and packaging machinery (Molins Technologies). The proposed sale is of the company’s other division, Instrumentation & Tobacco Machinery, comprising Cerulean and Molins Tobacco Machinery.

Management Incentive: With experience from a number of senior UK and international management positions Chief Executive Tony Steels joined Molins in June 2016 from speciality chemicals and materials technology company Cytec Industries. His remuneration for the remainder of the year was a salary of £130,000 and total of £195,000 and he doesn’t yet own shares in the company. Having joined the board in 1999, Finance Director David Cowen (FCA) had a salary in 2016 of £215,000, with total remuneration of £295,000 and has 144,519 shares in the company.

Recent Financials & Trading: For the 2016 calendar year, the Instrumentation & Tobacco Machinery division generated an operating profit of £0.3 million on revenue of £38.6 million, and the company states excluding this it “would have recorded revenues of £41.5 million (2015: £51.0 million) and a loss before non-underlying items (reorganisation costs and pension administration costs), interest and tax of £1.2 million (2015: £2.6 million profit)”.

However, it now particularly notes “positive progress in the Packaging Machinery division arising from the initial implementation of the plans identified from the strategic review”. The review followed the appointment of Tony Steels and also concluded on the proposed continuing business main end-markets (pharmaceutical, healthcare, nutrition and beverage), that they “are expanding at around 5% per annum and have attractive underlying long-term growth drivers such as urbanisation, convenience and health awareness”.

In contrast, on the Instrumentation & Tobacco Machinery division it noted “pressure due to health awareness and government tax schemes and the introduction to the market of a large number of new nicotine delivery products”. The proposed sale is for a net approximately £27.3 million, with the company noting pro-forma net cash of £25.4 million.

Risks: A General Meeting yesterday approved the proposed sale, though “completion of the transaction is dependent on the satisfaction of certain conditions, including certain registrations to be made in overseas jurisdictions being effected, the timing of which is not within the control of the company. A date of 31 July 2017 for completion is being targeted”.

There is also clear risk in a sustainable turnaround being delivered in the prospective continuing business, though the noted positive progress, growth drivers and pro-forma net cash support offer encouragement. It is also stated that the sale will “provide Molins with greater potential to invest in and acquire complementary businesses in its packaging machinery activities”, bringing acquisition risk. Additionally, there is a vast pension scheme to take into account – the 2016 annual report noting assets valued at £419 million and liabilities £421.2 million, with £1.8 million per annum of deficit funding and an actuarial funding valuation expected to be completed in the next few months.

Valuation: A current 125p offer price capitalises the company at just over £25 million – a discount to anticipated year-end net cash ( and even allowing for the pension deficit). Meanwhile, citing “strong organic growth and new initiatives on operational efficiency”, house broker Panmure Gordon is forecasting a breakeven performance this year, with profit then accelerating to around £1 million and then past £2 million in 2019.

There remains much to be done from here, but the recently updated progress and end-market dynamics encourage, and the net cash position will offer strong backing - and this before value-enhancing acquisition potential. We thus consider the current valuation too harsh an assessment and, having been well above 130p a few years ago before a profit warning attributed to “tobacco sector market conditions and geopolitical instability”, at up to 135p and initially targeting a £35 million valuation (10x noted forward profit + cash), the shares are today added to the Recovery portfolio with a 173.5p initial target price.

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve shortly and a new shorting piece from Lucian later this week click HERE

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