Eurocell — Moving up a gear

Eurocell — Moving up a gear

New management is driving an enhanced commercial focus. This was not wholly apparent in headline FY16 results, but was evident in strategic actions taken which are set to accelerate in FY17. Our sense is that the business will respond quickly to these initiatives. Eurocell’s share price has started to respond to the new corporate messaging and the delivery of profitable revenue growth is likely to attract further support.

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Written by

Eurocell

Moving up a gear

Construction & materials

QuickView

16 March 2017

Price

215p

Market cap

£215m

Share price graph

Share details

Code

ECEL

Listing

LSE

Shares in issue

100.0m

Business description

Eurocell is a vertically integrated UK recycler, manufacturer and trade distributor of branded extruded PVC building products (including window and door profiles and cellular roofline systems). Own branches also carry related fabricated and third party product and ancillary lines.

Bull

A leading position in fragmented markets

Integrated manufacturing & branch distribution model

Accelerating branch network expansion

Bear

UK RMI spending still relatively subdued

Product range relatively narrow but expanding

Some P&L lag from business investment

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

New management is driving an enhanced commercial focus. This was not wholly apparent in headline FY16 results, but was evident in strategic actions taken which are set to accelerate in FY17. Our sense is that the business will respond quickly to these initiatives. Eurocell’s share price has started to respond to the new corporate messaging and the delivery of profitable revenue growth is likely to attract further support.

Preparing the ground for further progress

FY16 results (revenue +16% y-o-y, PBT norm +5%, EPS norm +7%) contained both organic growth and acquisition contributions. Solid gross margin management took our eye (particularly important given opex inflation, partly due to business development) as did the strong free cash flow performance. The renewed executive management team (CEO, Mark Kelly, ex Grafton, GB and CFO Michael Scott, ex Drax joined in May and September respectively) has hit the ground running. Faster new branch roll-out (+18 to 159 at year end), manufacturing capex (including recycling capacity) and expansion of the branch range offering are all early markers of strategic intent from the new team. FY17 has started positively, in-line with management expectations.

Stepping up market presence

A strategy review appears to have greater commercial intensity at its heart. Most obviously, increased branch roll-out momentum (+30 expected in FY17, long-term target 350 in total) and broadening the SKUs carried is aimed at growing revenue. An aspiration to increase new product development activity and add adjacent product lines (organically or through acquisition) continues the theme. This has pull-through benefits for profile manufacturing. Investment in capacity and operating efficiency and direct control over warehouse management are all designed to sharpen service capability to support expected growth. Eurocell’s balance sheet and cash flow characteristics can comfortably accommodate this expansion, as described, and absent significant acquisition spend, the company could move into a net funds position during FY18.

Valuation: Positive EPS, DPS and cash prospects

Apart from a post Brexit mark-down in the middle of last year that afflicted many in the sector, Eurocell’s share price traded around 180p for most of the past 12 months. The share price started to pick up a month ago and FY16 results were also well received. We believe that the positive earnings and dividend growth prospects and cash profile of the business are likely to continue to attract investor support.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

175.9

23.0

18.6

7.0

11.6

3.3

12/16

204.8

24.3

20.0

8.5

10.8

4.0

12/17e

221.5

26.6

21.4

9.3

10.0

4.3

12/18e

239.0

28.7

23.2

10.3

9.3

4.8

Source: Bloomberg (Company defined, post amortisation)

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

PharmaMar — Strong newsflow expected in 2017

PharmaMar is approaching two key milestones in H217: an approval decision for Aplidin for multiple myeloma in Europe; and Phase III results for lurbinectedin in ovarian cancer. The Chugai licence deal for lurbinectedin in Japan has strengthened the company’s financial position (pro forma net debt €32m) and seen it put increased emphasis on its preferred strategy to either self-commercialise or co-promote lurbinectedin in the US. Separately, a US manufacturing patent granted last year has extended IP protection for lurbinectedin until at least December 2032. These developments have prompted us to adopt co-promotion in the US in our base case valuation scenario and to extend our rNPV model to 2035 vs 2030 previously. Our base case valuation has increased by 29% to €1.29bn (vs €1.01bn), or €5.79/share (vs €4.55/share).

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