This is a special situation investment and one which we believe is capable of creating substantial returns if management can successfully execute their plans.

Molins (MLIN:AIM) has a long history supplying machinery to the tobacco industry; that part of the business has now been sold for £30m.

The company is now focused on the packaging industry where it hopes to use engineering expertise and strengthened management to carve a lucrative niche.

Spending plan

Acquisitions are being considered such as buying businesses that will add specialist know-how or designed solutions. Molins is targeting the fastest growing sectors such as pharmaceuticals, healthcare, beverages and consumer goods.

Organic growth plans are equally ambitious. The company is aiming for organic compound annual growth of 10% between 2017 and 2019.

It also believes 10% operating profit margins are achievable over the medium-term, a target that led one analyst to comment: ‘Clearly this is no walk in the park, especially in the context of UK engineering norms.’ UK engineering sector operating margins average 5.5%.

Route to recovery

Product innovation, better after-sales and account management, and improved upselling will hopefully deliver on these ambitions. It wants to create better solutions for customers, potentially leading to faster growing revenues and economies of scale which could have a significant impact on profit.

Molins is anticipated to exit 2017 with around £22m on the balance sheet, and that’s after costs and tax from the tobacco business sale, plus a £2.7m payment to its pension fund (with an extra £1.5m held in escrow).

It is committed to an annual £1.8m contribution to the pension scheme going forward, even though it is currently running at an £11.1m surplus.

The £22m net cash position is worth 109p per share, which effectively means Molins’ operating business is valued at a mere 30p per share. It is forecast to make 10.4 per earnings per share in 2018 and 14.7p in 2019, so the stock is effectively trading on less than 3 times earnings.

Why? The market is still clearly nervous about the long term ability to manage the pension scheme which had £416m of liabilities and £420.5m fair value of assets, as of 30 June 2017. Those figures tower over the value of the equity.

Pension liabilities can easily change depending on estimates for inflation, life expectancy and returns on corporate bonds.

Therefore investors should treat this stock as extremely high risk despite the cheap price to earnings ratio.

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