Running a business which is heavily impacted by oil price volatility and the British weather is no easy feat but it’s one British Polythene Industries (BPI) chief executive John Langlands takes in his stride.

The unassuming Scot has led the century-old business since 2003 and is now celebrating its sixth consecutive year of growth with pre-tax profit up 14% to £25.1 million in 2014.

Headquartered in Greenock in the West of Scotland, BPI uses virgin and recycled polythene polymers to manufacture flexible film products for a range of industries. Over 30% of its sales are to the agriculture industry, 30% to the retail food chain and 14% to the construction industry. Its products include plastic stretch wrap for fodder on farms, refuse sacks, sandwich bags, films for food and drinks, sand sacks and damp-proof membranes used in the foundation of buildings.

Oil slide

Polymers, the mainstay of BPI’s business, are made using oil so I ask what impact the falling oil price has had on the company. ‘At the end of last year and the beginning of this year the falling oil price reduced the polymer prices we paid. This released working capital for us which we’ll see in the first half of this year. Lower oil prices also result in lower transport costs and energy costs, although increased taxes mean we’re no better off in 2015,’ says Langlands.

Polymer prices are set to increase in March and I ask how BPI manages this volatility. ‘We have a number of arrangements with our customers where the prices adjust to reflect the cost of polymer,’ Langlands explains.

BPI’s skill in managing polymer prices is evidenced by the steady rise in its group EBIT (earnings before interest and tax) margin pre-restructuring costs over the last 10 years. In the early part of the decade BPI had difficulties managing its margin - it was just £41 per tonne in 2004 - ironically before the recession when trading conditions were more favourable. In 2012 EBIT per tonne was £86 and it rose to £89 in 2013 and £97 in 2014.

The weather can also affect BPI, in particular its agriculture business. In the third quarter of 2014 volumes of silage stretch in the UK & Ireland fell by 2% due to waterlogged ground causing a late start to the grass growing season. ‘If we have a bad winter we sell more packaging for salt; if it’s mild we sell fewer animal feed sacks. Sales of packaging for soft drinks can also be impacted,’ says Langlands.

Another risk is perceived environmental issues surrounding polythene film. Could this lead to changes in customer preference? Langlands stresses polythene film is the most lightweight and durable packaging medium and claims it’s the best solution in terms of total energy expenditure. The group is also the largest recycler of waste polymer, reprocessing over 65,000 tonnes a year.

The £187 million cap faces the most margin pressure from its sales to consumer packaging customers. What does BPI do to manage this? ‘We just have to make our products as cost-efficient as we can and broaden our product and customer base,’ says Langlands.

Construction boost

The star performer for BPI in 2014 was its UK division, which achieved a 28% increase in operating profit to £11.2 million. Langlands says the UK performed well for two reasons: the recovery in the UK construction market - 2014 was the best year for British construction in over 18 years; and the group’s investment in machinery. ‘We made our machinery more efficient which achieved a greater output and reduced scrap and labour costs,’ Langlands says.

BPI’s European business - it has two plants in Belgium and one in Holland - also saw good growth with operating profit up 13% to £16.3 million driven by increased volumes of silage stretch and other industrial products.

Not so good was its North American business which incurred a loss of £0.8 million compared with a profit of £0.9 million in 2013. I ask what went wrong. ‘We acquired a business in North America a few years ago and we knew we would need to replace a major line. There were delays in delivering the line and teething problems starting it up and keeping our customers satisfied with their deliveries. The line is now operating well at our targeted levels and we look forward to a profit in 2015,’ Langlands says.

The CEO proved adept at steering BPI through the global recession. He rightly felt that agriculture, retail food and healthcare would be its most resilient divisions in an adverse economy and focused on improving sales in these areas. ‘In 2007 we shut a site that was heavily involved in the construction sector,’ he adds.

The group has also ensured its sales are spread evenly across lots of different customers - it has around 6,000 at present and none of these exceeds 3% of total sales. ‘We do have customers who are at risk but we have a tight position as far as credit is concerned and several of our customers are blue chips like Tesco and Dow Chemicals,’ says Langlands.

Borrowings

BPI has been very quiet on the acquisition front in the last couple of years. Langlands says the group is aware of various opportunities - which could arise in Europe and North America - but it isn’t actively looking. The main focus of the group is improving the business and reducing its borrowing.

BPI’s net debt came in at £24.1 million in 2014, down from £30.1 million the prior year, primarily due to its delayed spend on plant and equipment. The group had anticipated spend of some £20 million but several major projects have fallen into 2015 so actual expenditure totalled £16.6 million. Positive free cash flow of £13.2 million, dividend payments of £3.9 million, share purchases of £4 million and a small acquisition costing £0.3 million left £5 million overall net cash inflow.

BPI aims to spend £20 million this year on increasing capacity in its growth markets which Langlands identifies as the construction sector and silo stretch. This will hopefully translate to higher earnings in the coming years.

The group has a hefty pension deficit which increased to £83 million net of tax at 31 December 2014. Langlands says this was down to variable interest rates and insists the group is committed to reducing the shortfall. ‘The most significant thing to know is the company has agreed with its trustees to revise the inflation index for pensions in payment, which will have a significant impact. We’re also putting £11 million into the scheme and there is a payment plan which seeks to address the deficit. We’re proactive in looking at it and this will continue to be the case. These measures will reduce the deficit to £53 million net of tax at the end of 2015.’

(Click on chart to enlarge)

Modest value

When I ask about the group’s key focus for 2015 Langlands says, somewhat uninspiringly, that it will be ‘more of the same’. But when you look at the considerable effort management has put into improving the operational performance of the business and its astute investment programme ‘more of the same’ really reflects Langlands’ modest demeanour.

Analysts at Investec have increased their pre-tax profit forecast for 2015 by 4% to £27 million, citing the positive start to the year, good performances in the UK and Europe and an expected improvement in North America. They’ve also increased their target price from 750p to 800p, implying a potential upside of 15%.

We agree with the bullish sentiment and think the stock is modestly valued with its 2015 price to earnings ratio of 9.8. BPI has also recommended a 10% increase in the final dividend and Langlands says it plans to adopt a progressive dividend policy going forward.

Biography

John Langlands,

chief executive officer

John Langlands joined British Polythene Industries as group finance director in 1994, before being appointed chief executive officer in 2003. Prior to joining BPI he was finance director of Eclipse Blinds where he was part of a turnaround team which restructured the group and sold it to Headlam (HEAD). He remained as a non-executive director until the sale in 1997. His career also includes finance director stints at Scottish Enterprise and UnitedWire, which was subsequently acquired by Scapa (SCPA:AIM). John qualified as a Chartered Accountant in 1976 with KPMG.

British Polythene Industries (BPI) 695p

SUMMARY

BPI has a solid track record and has just reported its sixth consecutive year of growth. We expect further gains in the coming years given its planned capital expenditure programme and the likely turnaround in its North American division.

Bull case

• Solid track record

• Investment programme

• Improving UK construction
sector

Bear case

• Polymer price volatility

• Risk of customer insolvency

• Unpredictable weather conditions

Market value: £187 million

Prospective PE Dec 15: 9.8

Prospective PE Dec 16: 9.4

Prospective dividend yield Dec 15: 2.5%