Essentra (ESNT) 271p

Loss to date: 12.6%

We said to buy FTSE 250 components and packaging firm Essentra (ESNT) at 310p on 11 November 2021, believing it would benefit from ditching its conglomerate status and becoming a focused industrial parts supplier.

This shift might result in better profit margins and a higher stock market rating. To illustrate, Essentra’s components business has an operating margin of 19% while the filters business has a 9.5% margin and packaging has a 4.2% margin.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

So far, everything has gone according to plan. It has agreed to sell its packaging business to Austrian rival May-Melnhof for £312 million.

The price is slightly above the £302 million valuation in March and represents an exit multiple of 12.5 times EV (enterprise value) to EBITDA (earnings before interest, tax, depreciation and amortisation), well above the average multiple of nine times for recent deals in the sector.

The next step is to find a buyer for the cigarette filter business, which generated around £300 million in sales last year, roughly the same as the components business.

Although the sale process may seem more challenging due to the nature of business, the tobacco companies which the group serves are obvious buyers.

WHAT SHOULD INVESTORS DO NEXT?

While we are disappointed the shares are trading below our entry price, it means the company looks even cheaper. Stick with it.

Analysts from Numis forecast 23.6p earnings per share for this financial year, putting the stock on a multiple of 11.5 times.

If the filters business fetches £225 million, allowing for its low margins, that leaves the rump components business on nine times EV to EBITDA according to Numis estimates, which is attractive for a firm with a 19% operating margin and over £500 million in cash.

As Essentra turns itself into a higher-margin, pure-play components maker we believe the market and potentially other industry buyers will appreciate what it has to offer.

‹ Previous2022-06-30Next ›