Faisal Rahmatallah, the chairman of acquisitive manufacturing group Plastics Capital plc, speaks to Stockopedia News

While many analysts are uncertain about the future of the UK as a manufacturing centre, Faisal Rahmatallah remains resolutely upbeat. The chairman of AIM listed Plastics Capital (LON:PLA) has spent the last eight years building a UK-based plastics products manufacturing group focused on niche products and attractive export opportunities. In the aftermath of recession the business is back in profit and embarking on a strategy to win over investors with plans for steady growth and an eye on possible acquisitions.

Plastics Capital trades through four operating businesses – BNL Bearings, Bell Plastics, C&T Matrix and Palagan – which collectively manufacture plastic bearings, hose mandrels and creasing matrix – with around 50% of production being shipped abroad to the US, Europe and Asia Pacific. In the year to March, the company reported a swing pack to profitability after being impacted badly the previous year by the global economic downturn. Pre-tax profits came in at £1.8m on sales down 5.3% to £26.7m and debt down by £2.9m to £16.1m as the effects of a streamlining programme took effect. In the aftermath of the recession, Mr Rahmatallah has adopted a three step strategy with a focus on paying down debt, building organic growth and, when the time is right, looking again at acquisitions. He spoke to Stockopedia News about the evolution of the group and its plans for the future.

Faisal, before we start talking about Plastics Capital can you tell us about you and your background?

Well, my early career was spent in manufacturing before moving on to what is now Deloitte, mainly consulting to manufacturing clients. I became a partner there before joining a private equity development capital investment company called Capricorn Ventures International. That specialised in restaurants and financial services and was best known for being the controlling shareholder of Nando’s, the chicken restaurant chain. I helped set up their UK based investment business and then struck out on my own around 2002/2003 with one or two buy-and-build interests and, in particular, plastics. The other one, which is best known, was Broker Network, which was also an AIM listed company that I was chairman of.

So what was going on in the early days of Plastics Capital and what triggered the decision to start consolidation?

A couple of guys, who were manufacturing specialists, that I worked with in the past when I was at Deloitte, were leaving McKinsey and came to see me and said they wanted to buy into a UK manufacturing business. So I said I’d help them and we started looking around. UK manufacturing has been through quite a major restructuring and rationalisation over the last 20-30 years but some of the businesses that are left are really quite interesting and pretty good businesses. One of the early businesses that we came across was a specialist plastics products manufacturer and it looked pretty good and as we started looking at related and similar businesses we realised that there was an opportunity to do some acquisitions in the space, niche manufacturers, not necessarily UK based but there were quite a few in the UK that looked quite interesting. So we started in the UK and made some acquisitions into Plastics Capital. We stopped making acquisitions immediately after the Lehmans debacle.

There are a lot of people that are very cold on the idea of UK manufacturing. So what was the draw for you – what types of businesses were you going after?

It’s interesting, when these two guys came to see me I’d been out of manufacturing for about six or seven years doing restaurants and financial services and when they said ‘would you help us get back into UK manufacturing?’ I was pretty cold on it. But what is apparent to me is that those companies that have survived and done well despite 20 to 30 years of sterling strength and underinvestment by government in engineering, are actually pretty good businesses. In many cases, they’ve had to grind away and achieve competitive advantage in a global market in a very much root and branch way. I don’t mean to say that all UK manufacturing is great because there are still quite a lot businesses that are hanging on by their finger nails, there are a fair number of businesses that really just survive because it’s a UK market, the transport costs are too much to come in from overseas, that type of thing. But where there are those that have had to carve out a global niche, and if they’re making good money, then there’s usually something pretty good behind them and it’s generally a technological edge, a product, a processing edge, maybe a distribution channel and a brand that they’ve built up over that time span. So I wouldn’t be universally down on UK manufacturing, I think it just depends.

How easy was it for you to draw those businesses together to get them operating as one under a group?

Well it’s not rocket science. It takes time, obviously, and we have a set of group policies and practices and a group strategy and gradually those businesses both mould the strategy and then become very much an integrated part of the group. Again, when we were integrating these businesses, we never found ourselves in a particular rush to do it because the businesses we bought were, and remain, good businesses. The only ones that we rushed to integrate were one or two small bolt-on deals where the businesses we bought fitted, they had the right sort of product profile but they didn’t have a future as a manufacturing capability so we integrated those into our other operations. Otherwise it is a gradual process and it has worked pretty easily I’d say.

So if those factors were influencing success, how was the group impacted by the economic downturn?

Volumes in the end of 2008, beginning of 2009, were hit very severely and we were surprised about that. In retrospect they were hit severely primarily because of the export orientation that we have. So you basically had customers unable to get credit and you had lots of stock sitting in global supply chains. People conserved cash, they used up whatever stock they had, they didn’t place the same replenishment orders that they had been placing in the past and we found, on a quarter to quarter basis, volume declined by about 30% in the depth of recession. The worst quarter I think we had was January to March 2009 but then things started to pick up after that and they’ve gradually picked up, still not back to where they were, but they’ve picked up quite nicely since.

In the meantime you took action to reduce costs and streamline the group. Was that a difficult thing to do?

Well yes, it is always difficult to do that sort of thing because inevitably costs walk around on two legs and so it’s a lot of people and many of them had been with either the businesses that we acquired for a long time or they had been actually with Plastics Capital from the early days. So those sorts of things are always difficult to do. Clearly the depth of the recession, globally for everybody, then all the press and such like, I suppose made it easier because everyone understood that radical action was necessary and I don’t think we were alone in that regard. I think that probably applied to every business in the country or across the globe probably.

Using debt is a big element of any business looking to expand rapidly. You made progress in paying down some of that last year. What sort of priority are you giving to it now – is it as much of a worry now than perhaps it was this time last year?

Well it is still a top priority but it is considerably less of a worry. The covenant headroom that we had 12 months ago was very tight. We were badly impacted by foreign currency movements, in that some of our debt is in euros, and so we suffered a pretty significant unrealised translation loss on that debt. Our debt increased without us doing anything basically, just because the foreign exchange movement caused the debt to increase from, roughly speaking, £17m to £20m in the space of about three months. Now, the euro’s obviously weakened since then and that has helped us and we have been paying off quite a lot and we’re now getting it back down to the level where the covenant headroom is much better. It is still a priority because the current market, in terms of shareholder appetite for investment, is one where people like to see less debt rather than more debt. So that is still an issue but it’s nothing like a significant worry as we had 12 months ago.

Turning back to operations; in recent years you’ve focused on building a presence in China, India, the US and Brazil. What opportunities do you see in those markets?

Well lots of opportunity. In China we have a fair amount of business. It varies by subsidiary but in our creasing matrix business (C&T Matrix Ltd) it is probably our fourth or fifth largest market globally already, we have a couple of distributors there. In respect of our bearings business (BNL (UK) Ltd) we actually supply a fair number of companies in China but most of that is sold to other businesses elsewhere in the world. In other words we are supplying contract manufacturing facilities, that type of thing, in China. What we have done recently is appoint a business development manager for China and his job is to look for projects for our plastic bearings business there and he is already making some fairly good headway. We’ve also appointed an agent for our hose mandrels business (Bell Plastics Ltd). Rubber as an industry in China is one of those industries that is being promoted – the Chinese tend to pick sectors. Rubber, mainly tyres because that’s where most rubber goes, but all the tyre manufacturers typically have rubber hose operations as well and so rubber hose is getting a lot of support and there is a massive amount of potential business for mandrels in China as that particular industry develops and matures. So China’s a great opportunity.

In India, we’re just appointing a sales person for our creasing matrix business. We have appointed, in the last three months, a sales manager for our bearings business there. So we see good opportunity in India as well.

Do you see businesses out there that you would be tempted to look closer at in terms of acquisitions?

We are not spending a lot of time looking around for businesses at the moment. We are responsive to any opportunity that comes our way and we haven’t seen anything that we would be particularly interested in. It’s not a great environment for anybody to try doing acquisitions at the moment because anyone with a good business is not keen to sell at the moment because they want to wait for valuations to improve and they want to wait for their performance to improve. Even if you can find a company to buy you have then got to put the money together to buy it, which is, again, hard work to say the least.

The group joined AIM in 2007. Why did you take that route and what are your views about the market now?

Well why did we do it? It was one of the aims that we started with about three or four years earlier when we started to put the group together and we raised money initially from Investec (plc) (LON:INVP) and then Octopus. It was a landmark to pay down a fair amount of debt that we had got in that point in time, so the access to capital was important, but when you have a variety of different shareholders, as we did, we had founder management, other management, our bank had got some shares and then we had private equity institution in there, so you’ve got lots of different types of shareholders. If you’re listed it gives them the opportunity to exit and it gives you more flexibility in that respect than you would have if you were a private company. I think the combination of access to capital and financial flexibility we thought would be important.

What has happened since, of course, is unfortunately valuations have come down and we now sit with a very poor valuation and that means that while there is access to capital, it’s not really attractive because the PE is too low to warrant raising money to resume the acquisition strategy as things stand at the moment.

Therefore, there’s a three step process; first of all we need to keep paying down the debt, that will help the rating, we need to demonstrate organic growth as we come out of the recession, which we’re busy doing and we hope that’ll be clear in the next 12 months or so, that should help the rating as well. And if we can get the rating back up to where normal companies would be, then the acquisition strategy can resume and it will be back to business as usual. That might take 12 to 24 months quite frankly but that’s what we would be aiming to do.