Stock Picks | Coral Products - An Opportunity?

29th Sep '22 by jonno

8 comments 678 reads

I have just read the AGM statement from Coral Products, a company of which I have no previous knowledge, so I need to get my research hat on. For reference I have pasted the statement below. It is a minnow, but even in the current market turmoil, the investment metrics are enticing to say the least. I recollect a recent post by I think 'Effortless Cool' about the company, perhaps someone could direct me to it. Also I would be grateful for the thoughts and views, if any, of readers, positive or negative.

In the meantime I shall seek out the recent annual report.

All he best

Mr Joe Grimmond, Chairman of Coral Products plc, a specialist in the design, manufacture and supply of plastic products based in Wythenshawe, Manchester, will make the following statement at the Annual General Meeting of the Company which takes place at 12:00 p.m. today at the offices of Tatra Rotalac Limited, Southmoor Road, Wythenshawe, Manchester, M23 9DS.

"I am delighted to report that the Group has enjoyed a very strong start to our current financial period with sales and profits before tax materially ahead of the same period last year and in line with market expectations.

We have successfully integrated the operations of Film and Foil Solutions Limited, (sales of £10.3 million for the year to 31st December 2020) which was acquired in May 2022 and Alma Products Limited, (sales of £12.3 million for the year to 31st December 2021) which was acquired in June 2022. Both these acquisitions had, as forecast, a small negative impact on the Group's profit before tax for the period but the Group's profitability remains robust and both companies were acquired with expectations of improved performance as Coral begins to influence their direction. This was reflected in the price paid for the acquisitions.

On 19th September 2022, the Group announced the completion of the Acquisition of Manplas Holdings Limited ("Manplas"). Manplas will be integrated into our specialist logistics solutions operations centred around Customised Packaging Limited which will allow the Tatra business, located adjacent to Manplas, to expand into the vacated unit. Manplas had sales of £2.7 million in the year to 30th June 2021.

Whilst the short-term macroeconomic outlook remains challenging, the Group will continue to seek opportunities to strengthen and develop our business.

With our strong balance sheet, we are confident of further progress in the…

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Effortless Cool

29th Sep '22

Happy to oblige!

From 7 September:

Excellent results from Coral Products (LON:CRU) this morning. Revenue £14,391k, up 34%, pre-tax profit £1,330k (2021: -£316k), gross margin up to 36.7% (2021: 35.5%).

And a very important point: "[We have] review[ed] all group energy contractual relationships to confirm all group energy needs are of a fixed long-term nature agreed prior to the current energy crisis". And "all [group] operations will remain relatively unaffected by the current turmoil in energy prices".

Revenue next year will explode due to acquisitions - I am expecting £34m+. It's not in the forecasts and the market seems clueless about the huge short to medium-term potential here.

Stockopedia | Small Cap Value Report (Weds 7 Sept 2022) - Energy. HFD, FSJ, SOM, HEAD, AVON | By Paul Scott

From 22 September:

I am intrigued by the capital reconstruction currently being voted on by Coral Products (LON:CRU) shareholders.

The company proposes to cancel its share premium account (£5,621k at 30 April 2022) and its capital redemption reserve (£1,061k at 30 April 2022). By so doing, it will increase its distributable surplus by £6,682k (the sum of the two).

So far, so sensible. However, as at 30 April 2022, the Coral Products HoldCo already held distributable reserves of £4,906k. Cenkos forecasts operating cashflow of £1,416k for 2023 and £2,560k for 2024, compared to dividend plus interest costs of £1,270k for 2023 and £1,445k for 2024. Thus, it is clear that on current forecasts, the existing distributable surplus is perfectly sufficient to pay projected dividends and will, indeed, grow whilst doing so.

Why then look to more than double distributable surplus if what is there already is more than ample? I can only surmise that the Board intends to increase dividend payments materially above current forecast levels. To put this in context, the prospective yield is already around the 9% level on forecast dividends.

In this regard, it is perhaps notable that Joe Grimmond, the Executive Chairman, has a 7.72% shareholding and is 73 years old.

One hitch is that the Court may impose a requirement that a ‘special reserve’ is set up under the reconstruction to protect creditors. These would be the vendors of acquired businesses who are still due deferred payments. Special reserves would not be distributable until the relevant creditors had been satisfied.

Anyway, it all serves to a bit of intrigue to what I believe are already excellent prospects for the business, and I have added to my holding yesterday and today, taking me over 2%.

Any contrary views on this?

Stockopedia | Small Cap Value Report (Thu 22 Sept 2022) - BEG, SNWS, AQX, MORE, JDG, PBEE, VLG | By Paul Scott

jonno

Many thanks Effortless. I now need to get my 'bestest head on' to paraphrase Worzel Gummidge.

7th Oct '22

Hi Effortless Cool.

Intriguing as you say. I have had a good look at Coral Products (LON:CRU), website, products, annual report etc. As a holder of 2% of the equity you will be aware of the following, but it helps crystallize my thoughts by writing down some of the salient points, so please indulge me.

The special resolutions relating to the cancellation of the share premium account and capital redemption reserve have been voted through with an application to be made to the High Court currently on 8th November.

As far as I can tell there is the potential for a maximum earn out consideration of £1.5m in respect of the Alma Products acquisition. Then there is £901,000 held in escrow in relation to the purchase of Film Solution Limited, presumably already accounted for. Excepting the former I am unable to find any other contingent considerations, so the likely significant increase in distributable reserves does appear anomalous.

Directors hold close to 15% of the company which together with the age of Joe Grimmond who holds 7.72% may provide an insight, as you infer, as to the faith of the potentially 'excess' capital

It looks to me like an opportunity, although there are never any guarantees in investing or life. Time will tell.

All the best

sharw

FWIW I have sent this via the green button : "I have been looking at your page on Coral https://www.stockopedia.com/share-prices/coral-products-LON:CRU
It shows forward eps of 187p then 207p. I have got hold of the Cenkos forecast (evidently the only one) showing a forecast of 1.87p then 2.07p. Obviously you have lost the decimal point - no wonder it has a SR of 98! Please correct. Thanks".

8th Oct '22

I tried to add to what I wrote above but the one hour rule defeated me. Mercifully, because I don't trust Stocko, I copied it before sending it so here it is:

'Once bitten twice shy' - this has had a turbulent past, I bought in January and May 2016 at 21p and 20p. All was well until Jan. 2017 when there was a profit warning regarding a subsidiary and the CEO and CFO left with Chair Joe Grimmond becoming executive. The announcement included "Immediate steps have been taken to improve performance at Mouldings and losses are expected to be reduced from January 2017" and so I foolishly held on, encouraged byJoe Grimmond buying 100,000 shares @ 14.25p .

Then in October 2017 there was an encouraging AGM statement:

Joe Grimmond: "I am pleased to announce that trading for the Group has continued its improvement from the final quarter of last year.

Sales are significantly ahead whilst margins have been broadly maintained, notwithstanding the ramp up costs associated with our recently introduced automotive business.

We expect further sales and margin improvement over the remainder of the current financial period".

Great until 14.48 on Friday 12th January 2018 when shock profit warning. I sold that afternoon in two tranches - the first at 9p the second at 8.5p.

In March 2019 another warning - "materially below both Management and Market Expectations" sent the SP down to 5.9p and I was thankful I had got out when I did.

Am I tempted back in? With Joe Grimmond still Executive Chair I'm not so sure. What has changed?

Morning Sharw,

Alternative views always appreciated and important. It is essential to consider what can go wrong as well as the positives when coming to an investment decision.

sharw,

What has changed? Quite a lot, really. They have sold the problem subsidiary and the CEO went along with it. They have been running the remaining businesses profitably, generating plenty of cash, and made some promising acquisitions that scale the revenues almost fourfold. Grimmond seems to be treating shareholders very fairly too, with material share buybacks and generous dividend payments.

Maybe you're right not to trust Grimmond and that is certainly a good reason not to invest. I'm happy with my experience under his leadership, however.

Regarding the EPS error, I raised that with Stockopedia a week ago. I don't have any expectation that they will deal with it, however. I told them that SRT Marine Systems (LON:SRT) EPS projections were 100x too small back in August and nothing has been done about that.

22nd Oct '22

I'm having difficulty making sense of broker revenue forecasts. Assuming no change to the latest available revenue information for each group company, and a a proportionate share of that revenue for companies acquired this year, I get 2023 revenue of £41.1m versus the broker forecast of £34.6m, and 2024 revenue of £46.3m versus the broker forecast of £41.9m.

The full derivation is shown below.

Essentially, the broker is forecasting a 16% revenue reduction from 2022 to 2023 and then partially reversing that with a 10% like-for-like increase in 2024.

The AGM trading statement does not shed much light on things:

I am delighted to report that the Group has enjoyed a very strong start to our current financial period with sales and profits before tax materially ahead of the same period last year and in line with market expectations.

Given the acquisitions, it is meaningless to state that sales are ahead of the same period last year and, if they are in line with strangely low market expectations, then that would be disappointing.

However, the AGM statement also tells us that:

Thus, the two acquisitions made before the AGM were loss-making but profits were "materially ahead" of the same period last year, so it is hard to imaging that the existing business have not shown decent revenue growth.

My best guess at trying to make sense of this is that revenues on the two acquisitions have fallen back in this year, but that, nonetheless, are set at a very prudent level and likely to be materially exceeded.

Coral Products - an opportunity?

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Jonno

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