We’re making a bold contrarian call on private label household-to-personal care products supplier McBride (MCB) following a pair of profit warnings earlier this year.

Restructuring has left it a much simpler business with a clearer focus and one that is more attractive to retail partners. There is also private equity interest in the private label operator space.

Its stock trades on a mere 9.2 times forecast earnings for 2019 and offers a 3.6% prospective dividend yield.

Net debt at the end of 2017 was £122.8m which is roughly half of its market cap. Yet it is worth noting that McBride recently agreed a deal to sell its European Personal Care liquids business for £12.5m with the money earmarked to help reduce borrowings.

WHAT DOES IT DO?

McBride is a leading developer and supplier of products for sale under retailers’ own brands, often referred to as private labels or own labels.

These span everything from toilet cleaners and laundry products to shower gels and toothpastes and are supplied to Europe’s leading grocery retailers.

Previously an over-complicated, over-indebted concern with too many customers, McBride’s margins and growth prospects have been materially improved under the stewardship of CEO Rik De Vos.

McBride recently flagged weaker-than-expected sales in May and June and some additional costs from new business wins.

Household revenues in France continued to decline, the Personal Care and Aerosols (PCA) arm will deliver higher than envisaged losses amid sales weakness, while McBride also flagged an impact from higher distribution and warehousing costs, largely connected with new German volumes.

In light of these issues, investors should only buy the shares if they have a large appetite for risk and money they can afford to lose. Profit warnings often come in threes, so we cannot rule out a further shock to the share price near-term.

Encouragingly, McBride reported better-than-forecast sales in Germany and from acquired auto-dishwash-to-laundry products supplier Danlind, which has brought exposure to the fast-growing dishwasher tablets market and a range of Nordic customers.

The Manchester-headquartered concern is better placed to profit from the structural growth in private label and contract manufacturing and to continue to bag business from weaker competitors.

Down-trading by cash-strapped shoppers to cheaper private label offerings is boon for McBride, as is the trend towards contract manufacturing, as brand owners seek to drive improved financial performance.

Numis analyst Damian McNeela argues the shares look attractive ‘with or without a suitor’. He forecasts a drop in pre-tax profit to £31.7m for the year to June 2018 (2017: £34.6m), before surging to £38.8m in 2019. (JC)

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