Accrol Group Holdings plc (LON:ACRL) is analysed by Tom Fraine, Equity Analyst at Shore Capital following the announcement today that it has completed the acquisition of a c.£5m revenue wet wipe and tumble dryer sheet manufacturer, Severn Delta, based in Somerset.
Q1. Tom, what’s your view on Accrol’s acquisition of Severn Delta?
The acquisition was completed for an EBITDA multiple of less than 3x before synergies, which we deem to be very good business, and was funded by Accrol’s existing cash reserves.
We are encouraged to see this acquisition being completed, noting Accrol’s success in generating exceptionally strong growth from John Dale, which was acquired for a relatively low total consideration too, and also its successful purchase and integration of LTC.
Severn Delta extends Accrol’s product offering in a complementary manner, adding capacity and new capabilities to the Group’s wet wipe segment, a growth pole for the Group, which has been growing exceptionally well. We see scope for management to scale up Severn Delta and highlight John Dale’s sales roughly tripling within two years of it being acquired in April 2021, and continuing to grow strongly.
The total consideration of the Severn Delta acquisition has not been announced but we do not expect a significant change to Accrol’s net debt position. We are highly encouraged to see management continue to execute on its strategy of leveraging the Group’s strong operational capabilities and customer relationships to broaden its household products offering.
Q2. What benefits will its planned future self-funded investment in a paper mill bring?
We view the prospect as highly accretive: it is expected to have a payback period on the initial net cash outlay of less than one year and, is likely, in our view, to drive a further material increase in the Group’s margins after becoming operational, expected in mid FY25F. Vertical integration, through the investment in the mill, should enable lower and reduced volatility of costs without compromising the flexibility of sourcing various grades of paper. Management expects gearing to remain below 2x after the investment in the mill.
Q3. What’s your view on Accrol’s investment case and valuation?
I’d draw readers attention to several things:
- Accrol has been performing strongly over the past year, which has led to multiple EBITDA forecast upgrades. The Group’s transformational automation programme is now complete, and capital expenditure is accordingly set to more than halve in FY24F, which we like.
- We anticipate strong cash generation and forecast >£13m free cash flow for FY24F, implying a very attractive c.12% FCF yield.
- Capex requirements are set to remain low in the medium term too as the Group has 20% excess production capacity to support continued volume growth (we estimate £3-4m ongoing).
- Stabilising input costs and market conditions, discount grocers’ market share gains (including Aldi’s share being up 0.6ppt YoY at 9.9%, as of October 2023) and growth in private label sales across the UK trade are all clear tailwinds for FY24F earnings.
- Labour inflation is far less of a headwind for Accrol following the completion of its c.£20m automation-related capital expenditure programme in CY22 substantially increasing revenue per head to c.£575k in FY23A. We believe it positions the Company as the lowest cost tissue manufacturer in the UK.
- Management’s strong track record provides us with confidence that it can scale up the Severn Delta business significantly and continue to execute on highly accretive M&A opportunities.
We also contend that Accrol Group Holdings’ excellent asset base, high-quality management, strong customer relations and fabulous operating platform are simply not adequately valued on its current equity multiples. We reiterate our fair value of 50p (45% upside).
