Shares in Zotefoams (ZTF) have been under pressure in recent months and suffered their latest setback after the specialty chemicals maker said it was withdrawing from its carton packaging initiative ReZorce last month.
The potential of ReZorce had generated significant excitement so this is a setback but the current valuation is not given Zotefoams anywhere near enough credit for its core business.
As a third-quarter update on 4 November revealed this remains healthy – with a 54% increase in sales to £39.7 million with footwear-related revenue – representing 48% of sales in the period – higher than anticipated.
Over the past six months Zotefoams shares have fallen more than 30% and are currently trading on 10.5 times consensus forecast earnings for 2025 – well below the long-term average valuation based on Shares calculations.
In fact, the last time it was trading anywhere near this cheap was during the 2007/8 financial crisis.
WHAT DOES ZOTEFOAMS DO?
Zotefoams ongoing partnership with US footwear brand Nike (NKE:NYSE) since the Rio Olympics in 2016 is a key strength.
The Croydon-headquartered firm has an exclusive supply agreement with Nike to collaborate on ‘technical foams’ for high-performance footwear until 31 December 2029.
Their partnership has evolved from originally focusing on distance road running shoes and track spikes to later extending into trail running footwear with the Nike Zegama (launched in 2022).
New Nike chief executive Elliott Hill has announced plans to return the sportswear company’s focus to sport and product innovation as part of a turnaround plan and this could bode well for Zotefoams.
The company’s foam-based products are used in everything from air conditioning units to the aircraft industry, cars, chips, electronics, healthcare, transport and even sports and leisure equipment like cricket pads.
Its main markets are footwear, as discussed, product protection and transportation, which includes aviation and aerospace, automotive and rail.
Footwear sales form a significant part of Zotefoams’ High-Performance Products Division (HPP) – its most profitable division.
The specialty chemicals’ aim is to become the world leader in cellular-materials technology in markets with elevated levels of organic growth, both through its own brands and through partnerships and targeted acquisitions.
The plan for the ReZorce product was to use proprietary microcellular foaming technology to create a circular packaging solution for beverage cartons – representing a fully recyclable mono-material.
In December 2024 Zotefoams said it was winding down the operations of its MuCell business, which encompasses ReZorce, because it had been unable to find a strategic partner for ReZorce and specialist external advisers to support commercial development.
Ronan Cox CEO of Zotefoams said at the time: ‘This decision will allow us to redirect the considerable financial resources that we have been dedicating to the ReZorce project to focus on the exciting opportunities we have within the core Zotefoams business, and we will be sharing our plans in this regard at a capital markets day expected early in 2025.’
Broker Peel Hunt did not adjust its forecasts for the ReZorce exit with analyst Lauren Baker Iguaz commenting: ‘Although this announcement is disappointing, the decision to pause investment into ReZorce and remain focused on the core businesses is sound.’
CATALYSTS FOR RECOVERY
We think CEO Ronan Cox, who took the helm in April 2024, has the credentials to energise the business.
His experience from various executive roles at Coats Group (COA), the world’s largest thread and structural components’ manufacturer for apparel, footwear, and performance materials, should serve him well.
The company is due to deliver its year-end trading update on 23 January and if this confirms expectations for 2024 and the outlook for 2025 then we would expect the market to react positively. A promised investor day early this year is another potential catalyst which could drive the shares higher.
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