McBride’s H1 results revealed a mixed picture by geography. Household revenues were down 1.4% at constant currency and group revenues were down 4.4%. Adjusted operating profit was down c 30%, and there was a marked slowdown in the business during November and December. However, January saw an improvement. FY guidance has been maintained, implying a better H2 helped by easier comps and a relatively benign raw material outlook, although we note that distribution costs were higher during H1, and management highlights that markets remain challenging. The new CEO, Ludwig de Mot, has initiated a comprehensive review of the business, on which he expects to report at the FY results in September. Following a series of disappointments, the valuation fairly reflects the balance of risk and opportunity.
Industry overcapacity remains a problem, especially as the smaller, privately held suppliers are often prepared to accept lower margins. McBride is well-placed in that it commands leading market shares in a fragmented space, but the long tail of small suppliers continues to pose a challenge. Consolidation and rationalisation in the space is long overdue, but the pace of change is likely to be slow.
In the results statement, management highlights that the markets remain challenging. Raw material costs have stabilised, but distribution costs were up, and the full-year effect of some contract losses is still being felt. Some of these contract losses occurred due to greater focus on profitability, leading to the loss of some very low-margin business. Others, however, were symptomatic of the tough environment: for example in fabric conditioner, Aldi changed its supply back to dual sourcing, where previously McBride enjoyed sole supplier status.
McBride trades on 9.0x FY20e P/E and 5.5x FY20e EV/EBITDA, which is a sharp discount to the household sector. A re-rating is conditional on a successful stabilisation of the business following the profit warnings over the past 18 months, and then a convincing turnaround strategy with a focus on improving margins and ensuring any cost savings and operating leverage fall through to the bottom line. Adjusted operating margins stood at just 4.0% for FY19 and ROCE at 15.3%, down from a peak of 27.7% in FY17. Net debt cover remained comfortable at 2.2x as of December 2019, and the dividend is 2.4x covered with a 4.7% yield for FY20e.