Molins is a technology and services group that provides instrumentation, machinery and analytical services to the tobacco, consumer goods, healthcare and pharmaceutical sectors. In Scientific Services Arista labs, based in the US is a tobacco and smoke constituent analytical lab and Cerulean, based in the UK develops, sells and maintains process and quality control instruments for the tobacco industry. In Packaging Machinery Langen, based in Canada, the Netherlands and Singapore is a designer and manufacturer of cartoning machinery, case packers and robotic solutions; and Molins Technology, based in the UK is a specialist engineering supplier, developing innovated technology and associated packaging machinery. In Tobacco Machinery, Molins Tobacco Machinery designs and manufactures secondary tobacco processing machinery. The group has now released its final results for the year ending 2013.

Revenues increased across all of the businesses but with cost of sales also increasing, gross profit was only some £1.3M higher than last year. This was counteracted by the lack of a one-off credit on the pension scheme (due to UK employees ceasing to accrue benefits in the scheme), somewhat offset by lower reorganisation costs so that the operating profit was exactly the same as in 2012. When compared to last year, there was a £600K higher interest cost on the pension scheme, somewhat counteracted by lower tax so that the profit for the year, at £3.5M, was £300K lower than last year.

When compared to the end point of last year total assets were up by £1.3M in 2013. This was driven by a £1.8M increase in trade receivables, a £1.7M growth in the levels of cash and a £1.4M increase in prepayments and deferred income, somewhat offset by a £4.6M reduction in deferred tax assets. Conversely liabilities fell during the year, broadly driven by a £13.6M collapse in pension liabilities as higher investment returns led to an improved valuation, and a £1.7M fall in deferred tax liabilities which were somewhat mitigated by a £3.9M increase in loans, a £2.2M increase in trade payables and a £1.2M growth in deferred income and accruals. The end result was an impressive £9.3M increase in net tangible assets at £25.3M.

Before movements in working capital the cash profits were flat on last year at £7.4M. An increase in receivables was predominantly responsible for operating cash flow before reorganisation being some £2.1M lower than last year at £5.8M before this was eroded further by £700K of reorganisation costs and a £1M tax bill to make the net cash from operations £4.1M, £2.5M worse than in 2013. Of this cash, £1.9M was spent on tangible assets, £700K was spent on an investment property and £2.2M was spent on development expenditure. Clearly operational cash flow hasn’t covered these expenses, let alone the £1.1M spent on dividends so the group needed to take out £4.2M more in loans to give a positive cash flow of £2.3M.
Scientific Services operating profit increased by £700K to £1M but underlying profits were £1.1M, down by £100K when compared to 2012 as Cerulean’s strong performance was offset by activity at Arista. The growth in sales at Cerulean was driven by improvements in their largest market, China, and good progress was also made with the multinational cigarette companies. The business uses its experience to advise customers on issues relating to quality control in production and lab environments and it benefited from a large order from a customer in North Africa to design and fit out their new labs, incorporating the Molins technology.

Sales at Arista were hit due to the fact that no regulatory testing was required in the US during the year due to ongoing delays in the confirmation of a testing regime. There were, however, orders secured for a variety of testing requirements for cigars and the growing e-cigarette market. As well as developing products for the tobacco industry, Cerulean also continued to develop its product range for a variety of industrial applications with progress in sales for its carbon tester and enzyme sampler. At Arista there was a focus on the development of the business with non-regulatory tobacco testing and non-tobacco markets. Cerulean started the new year with an order book similar to that of last year but the competitive environment has become more challenging after the two main competitors were taken over by the same company. The outlook for Arista is rather uncertain with no firm indication of when further regulatory testing will be required.
Packaging Machinery profit increased by £100K to £1.5M with lower margin projects and increased sales and marketing costs due to the new office in Singapore, offsetting the profitability from increased sales. Langan’s order intake was at a similar level to last year as increased momentum in Europe counteracted reduced sales in North America. Molins Technology performed well during the year with order intake increasing significantly when compared to recent years and good progress was made in broadening the customer base. Particular progress was made in the pharmaceutical sector with orders for new machinery and engineering solutions as well as for repeat applications and the business ended the year with a much improved order book. As a whole the division entered the new year with an order book some 10% above last year but order prospects during the first half of next year are not as strong as last year but progress is expected to be made due to increased margins going forward.
Tobacco Machinery profits fell by £700K to £2.9M. Overall order intake was slightly ahead of last year with increased orders for new and rebuilt machinery compensating for a reduction in aftermarket orders. The increase in machinery orders was most notably apparent in Asia, North America and South America and the division benefited from being able to provide relatively short lead times. Sales of spare parts fell by 15% reflecting mainly softer demand in Asia. The division received its first orders for its new filter making machine and several others are in the pipeline. The business entered the new year with a slightly reduced order book but with good prospects for machinery orders and an active aftermarket requirement
During the year the packaging machinery division established both a sales and a service operation in Singapore and a sales office in Thailand and the Tobacco Machinery division focussed on market developments in the Middle East and Africa. The division also launched a new filter making machine and completed the development of the Alto making machine, which produces 10,000 cigarettes per minute and will begin trials in 2014.
Pleasingly the group is well diversified and no single customer makes up more than 10% of revenues. The group entered the new year with an order book at a similar level to last this year and whilst the board remain mindful of the uncertain economic and regulatory environment they are cautiously optimistic that the group will continue to progress.
At the end of the year the group had net funds of £5.2M compared to £7.4M at the end point of last year. At the current share price the P/E ratio is a suspiciously cheap 4.5, rising to a still cheap 6.5 on next year’s forecast. There was no change in the payout but at the current price the shares are yielding a remarkable 6.9% and according to forecasts this is likely to remain the same next year. This really is an impressive return but it seems the market is a little sceptical about the sustainability of the dividend. Overall this was a mixed set of results with profits fairly flat and the operating cash not fully covering costs before dividends but an improvement in the pension valuation meant that net assets improved over last year. The Scientific services division looks like it might struggle going forward until further moves are made on US regulation. Despite the good valuation, it seems to me that momentum is not really with the group so I will wait on the side lines for the time being.