Fund managers can learn a great deal from physicists. Indeed legendary investor Warren Buffett realised early in his career that by applying Sir Isaac Newton’s 3rd Law of Motion (“For every action there is an equal and opposite reaction”), he could become one of the world’s richest men. You see Wall Street’s wild mood swings often flip-flop between irrational exuberance and manic depression - meaning that by adopting a contrarian view to the herd, canny investors can reap handsome rewards.
This is the situation today for many unloved precision engineers after the recent bout of volatility. Sure, the immediate outlook is challenging in light of a mini meltdown in global manufacturing, elongated customer decision making, destocking and fears of a Chinese hard landing. Yet if one peers through this temporary fog, the longer term fundamentals remain intact, with many quality companies possessing leading positions in attractive niche markets, backed by strong intellectual property (IPR) and respected brands. Take Molins, a leading manufacturer of high speed packaging machinery (59% of group sales) and cigarette making machines, as well as process/quality control instrumentation (Cerulean). This morning it reported 2015 results that were in line with expectations; delivering revenues, adjusted PBT, EPS and net debt from continuing activities of £87.0m (-0.4%), £3.8m (-29.2%), 15.1p (-32.6%) and £3.2m (up £1.1m) respectively.
The YoY decline was principally caused by a sharp contraction in demand across Tobacco machinery and Instrumentation (note. Aftermarket services were flat), partly offset by decisive self-help measures, product innovation and a standout performance from Packaging.
Here, operating profits more than doubled to £3.9m on the back of a 26% jump in LFL revenues to £51.0m, driven by a broadening of the customer base (eg focused on nutrition, beverages, pharmaceutical and healthcare), new products, a robust opening backlog and buoyant Asian demand, where factories are being increasingly automated in order to reduce cost and improve quality. What’s more, EBIT margins widened 320bps to 7.6% thanks to greater operating leverage and a shift towards more standardised (rather than bespoke) systems.
That said, trading conditions softened towards the year end, with customer purchasing decisions lengthening “across all regions”, as a result of less confidence in the global economy. This more subdued trend has continued into 2016, and accordingly we now expect Packaging revenues and EBITA to decrease this year to £43m and £2.4m respectively. It should be noted though that there are a significant number of large projects in the pipeline, and this type of capex can only be deferred for so long by customers without compromising their performance.