Molins has now released its interim results for the year ending 2016.
Revenues declined when compared to the first half of last year with a £3.6M fall in packaging machinery revenue and a £900K decrease in instrumentation and tobacco machinery revenue. Cost of sales also declined, however, to give a gross profit £1.5M below that of last time. Distribution costs fell by £400K which meant that the group made an operating loss, a £1.1M detrimental movement and the lack of any pension scheme expenses which cost £400K last year, meant that the loss for the period came in at £300K, a detrimental movement of £700K year on year for continuing operations.
When compared to the end point of last year, total assets declined by £13.3M to £68.6M, driven by a £10.6M elimination of the pension surplus and a £5.9M reduction in cash, partially offset by a £1.8M growth in inventories. Total liabilities also declined during the period as a £3.4M growth in the pension liability was more than offset by a £4.2M fall in deferred tax liabilities, a £4.1M decrease in borrowings and a £1.4M decline in payables. The end result was a net tangible asset level of £15.1M, a decline of £6.6M over the past six months.
Before movements in working capital, cash profits declined by £800K to £1.5M. There was a broadly neutral working capital position compared to an inflow last year but a £900K pension payment meant that after £800K less cash was used in discontinued operations, there was a net cash outflow of £100K from operations compared to an inflow of £400K last time. The group spent a net £600K on property, plant and equipment along with £800K on development costs so before financing there was a cash outflow of £1.4M. The group paid back £4.3M in loans and £300K on dividends so the cash outflow for the period was £6M and the cash level at the period-end was £4.3M.
The group just about broke even in the Packaging Machinery business which represented a deterioration of £1.1M when compared to the first half of last year. The division experienced a challenging first half of the year with order intake reduced in most regions, reflecting the continued deferral of customer investment decisions. Currently order books are lower than this time last year and the conversion of prospects to orders is more difficult to predict in the current environment. They have achieved a growth in the aftermarket business which is expected to continue into the second half, however.
The group made a profit of £200K in the Instrumentation and & Tobacco machinery business, a decline of £100K year on year. As expected, conditions in the tobacco sector continued to be a challenging and market opportunities for sales of cigarette making machines remain relatively low. Competitive pressures to secure machine orders have therefore resulted in reduced margins for those orders that are secured. Orders for the aftermarket activities remain quite strong, however, and demand for instrumentation activities held up in the period following better order take in the last few months of last year. The board believe there will some softening in the key Asia region for instrumentation in the second half, however.
Field trials of the Alto cigarette making machine were completed last year and orders for production machines were secured in the first half of this year. Optima, the new cigarette packing machine, began field trials this year which are ongoing and encouraging. These two major machine introductions, alongside other ancillary equipment, means that the division has completed a significant programme of development, expanding the addressable market. They also continue to enhance the product range of the instrumentation business to support its position in the tobacco sector and its expansion into new sectors.
The group continues to suffer from its huge pension plans. They are responsible for the payment of a statutory levy to the pension protection fund and the amount of this is dependent on a number of factors including a specific method of calculating a pension deficit for this purpose and a credit assessment of the company. The levy that will be paid this year will be considerably higher than that of last year. In addition, the UK pension scheme is subject to a formal triennial actuarial valuation and the deficit recovery plan is expected to be reassessed shortly (it currently stands at £1.8M per annum).
In June the group appointed Tony Steels as CEO and in the coming months, the primary focus will be to review the strategic direction of the business which they expect to be completed by the end of the year.
As in previous years, the full year trading performance will be significantly weighted towards the second half but the group are experiencing continuing delays in receiving orders and are therefore taking a more cautious view of the short-term training outlook so that the board has revised downwards its trading expectations for the current year.
At the current share price the shares trade on a PE ratio of 6.5 which increases to 18.4 on the full year consensus forecast. After the interim dividend was halved, the shares are yielding 5% which is expected to remain the same on the full year forecast. At the period-end the group had a net debt position of £4.6M compared to £3.2M at the end point of last year.
On the 12th December the group released a trading update for the year as a whole. Trading in Q4 has been materially lower than expected, partially due to an unfavourable sales mix and a number of deliveries delayed into the early part of 2017. As a result the board is revising downwards is expectations of full year performance.
Order intake in the last three months has been positive, however, at an increase of 80% over the same period last year, with the packaging business in particular benefiting from a strong period of conversion of prospects. The consequence of this recent order activity is that the group is expecting to enter 2017 with a significantly higher order book than it had entering this year.
Overall then this has been a difficult period for the group. Losses worsened, net assets worsened due to the pension schemes and the operating cash outflow grew. The packaging machinery division saw the worst of the decline as customers deferred investment decisions and the instrumentation and tobacco machinery division continued to be subdued in a difficult market for the tobacco industry. The pension scheme is another risk but the new CEO will hopefully bring a new impetus to the group. On a PE ratio of 18.4 and dividend yield of 5% the shares don’t look cheap but we have subsequently heard that Q4 has been poor and the performance for the year as a whole is not going to be good. Having said that, there is a glimmer of hope with the increased order intake.
Perhaps worth a punt when more clarity is available but the shares don’t look that cheap at the moment.