McBride’s restructuring programme is under way and starting to deliver major benefits. The business is being streamlined and the reduction in complexity is significantly lowering cost, improving reliability and hence the ability and scope to serve the more profitable customers. Once this is complete, the group will operate at a lower cost and with far fewer constraints, thus presenting material savings, and with the potential to build further growth in the medium term.
Although the next two years are likely to be mostly about the transition as the company goes through the ‘repair’ phase of its transformation, H116 results provided positive news as the outlook was raised. It has carved out the Personal Care/Aerosols (PCA) division and appointed a dedicated management team to devise a specific improvement plan, as the business was lagging and requires further measures beyond those being implemented for the Household division.
The new strategy was only presented six months ago, but the business simplification is under way and cost savings are already being delivered. Although cutting 75% of its customer base is difficult, all customers have now been informed. While we should not underestimate the challenges in delivering such comprehensive change within a company, cost savings are already starting to come through, and customer service levels have improved by a full 110bp. The medium term (three- to five-year) target of 7.5% adjusted EBITA margin and 25-30% ROCE should be achievable. While the H116 adjusted EBITA margin was only 5.1%, private label consumer peers have historically achieved high single-digit to low double-digit operating margins. We also note McBride’s H116 ROCE was 23.6%, which is approaching its medium-term target.
McBride trades on 16.8x FY16e P/E and 14.0x FY17e P/E, which is a sharp discount to the household sector. The simplification of the business should provide a solid platform on which to build further growth. A re-rating is obviously conditional on the successful delivery of the turnaround programme and ensuring that cost savings fall through to the bottom line, but early signs are promising.