Boring can be beautiful. Often businesses operating in seemingly unglamorous industries are often able to generate strong shareholder returns, among them toilet roll specialist Accrol (ACRL:AIM).

Liberum Capital has initiated coverage (10 Jul) with a ‘buy’ rating and 200p price target implying 32.5% upside, arguing Accrol is well placed to capture growth from the consumer shift towards value formats.

On a roll

Lancashire-based Accrol manufactures toilet rolls, kitchen towels, facial tissues and AFH (Away From Home) products including hand towels and industrial wipes. The company supplies UK discounters, major supermarkets, independents and AFH customers with private label and Accrol-branded products such as Triple Softy toilet tissue.

Customers include Booker (BOK), B&M European Value Retail (BME), Wilkinson and Aldi and increasingly the major grocers such as Tesco (TSCO), ASDA and WM Morrison Supermarkets (MRW).

Accrol is geared into the structural spending shift towards the discounters and cheaper own-label products. As retailers push up prices to mitigate cost inflation, these trends will only accelerate. An agile Accrol, which has invested in a new manufacturing facility at Leyland to create extra capacity, is well placed to benefit.

Wiping away the competition

We like Accrol’s relatively capital light, flexible model. The company buys in 100% of its parent reels (paper) and doesn’t have any capital tied into paper mills, giving it the flexibility to take advantage of an over-supplied industry.

Improving efficiencies and investment in new technology is enabling Accrol to win profitable new contracts. One of last year’s highlights was a deal to launch Lidl’s Floralys range in November 2016.

Significantly, the discount segment, where Accrol’s market share has grown to over 50%, is the fastest growing part of a UK tissue market estimated to be worth £2.2bn and growing at around 1% a year by value, helped by the UK’s mushrooming population.

Maiden results for the year to April (10 Jul) revealed a 58% surge in adjusted pre-tax profit to £13m on sales up 14.2% to £135.1m. Net debt reduced by £41.7m to £19m, reducing Accrol’s net
debt-to-adjusted EBITDA ratio from 4.0 times to 1.2 times.

For this year, Liberum forecasts pre-tax profit of £14.6m for earnings of 12.5p (2017: 11.8p) and a hike in the dividend from 6p to 7.5p.

Despite a 51% rise from June 2016’s IPO (initial public offering) price, the shares should have further to go given a modest prospective price-to-earnings (PE) multiple of 12.1 times. With free cash flow rising, Accrol also offers a prospective yield approaching 5%.

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