When it comes to unglamorous and boring industries, tissue paper manufacturing must come high on the list. And it is for this reason Accrol Holdings caught my eye. To me, boring can be beautiful. Many investors frequently make the mistake of chasing fashionable growth shares that are highly priced. They chase the Tesla’s And Twitters of this world and often forget about the mundane but highly cash generative ‘steady eddies’ of the stock market.
There is a strong case to be made that businesses operating in seemingly unglamorous industries are often able to generate strong shareholder returns. Peter Lynch – the famous manager of the Magellan Fund whom compounded money at a ridiculous 29% pa – believes that the more unattractive a company sounds, the better of an investment opportunity it is.
One of the reasons boring companies do so well is due to their low profile. Boring companies, no matter how profitable, hardly seem to make the headlines. Exciting companies on the other hand garner constant media attention. The advantage of a low profile is that the company does not get wildly overpriced based on media frenzy – Snapchat Inc anyone. Having a low profile also ensures that most investors are not aware of the company thus leading to a greater chance of the company being lowly valued. And the advantage of this is clear; history has showed that low valuation multiples will lead to better results on average.
Another great facet of a boring business is they are not too focussed. on ‘going big’. They instead chose to execute well on what their customers need, what the market provides, and what they can control, giving them a resilience against the changing tides of the greater economy. They also know what they don’t know, whether that means having an aversion toward cutting-edge technology or laughably outdated branding. Despite these gaps, they continue to make customers happy and in turn generate profits. They’ve seen too many “sure things” come and go to get excited about the unproven; they choose to stay focused on the mundane day-to-day execution that keeps customers coming back.
Accrol Group Holdings Analysis
Accrol is a Lancashire based company that manufactures toilet rolls, kitchen towels, facial tissues and AFH (Away From Home) products including hand towels and industrial wipes. Accrol – which only listed on the stock exchange last June – supplies a wide range or retailing customers with private label and Accrol-branded products such as Sofcell and Mega Jumbo Kitchen Towels.
As well as the company’s products being stocked by the major retailed – Tesco, Asda, WM Morrisons – it has a strong foothold in the discount sector with customers such as B&M, Aldi and Lidl. This discount sector exposure is particularly interesting as it is the fastest growing part of the UK tissue market and Accrol already has a 50% share.
What differentiates Accrol from other tissue paper manufactures relatively capital light, flexible model. The company buys in 100% of its parent reels (paper) and doesn’t have any capital tied into paper mills, giving it the flexibility to take advantage of an oversupplied industry.
Being asset light also means that the company can deliver better returns on capital, is able to move faster to take advantage of new trends and, in the long term, may make them more sustainable.
Accrol reported maiden results in July and it showed a 58% surge in adjusted pre-tax profit to £13m on sales up 14.2% to £135.1m. Net debt reduced by £41.7m to £19m, reducing Accrol’s net debt-to-adjusted EBITDA ratio from 4.0 times to a more respectable 1.2 times.
Current year forecasts suggest the company should make pre-tax profit of £14.6m for earnings of 12.5p ( last year: 11.8p). With increased earnings, the dividend should also jump from the current 6p to 7.5p a share.
My Purchase of Accrol Holdings (ACRL)
I bought 995 shares in Accrol this past week for 138p each. Despite a 38% rise from the company’s IPO (initial public offering) price little over a year ago, the shares should have further to go given a modest prospective price-to-earnings (PE) multiple of less than 12.
For a company that is still growing, Accrol offers a fantastic yield of 4.3% which is well covered by free cash flow. For my 995 shares, I am expected to make £60 in dividends this year which should rise to £74 next year.
Accrol is one of those companies that is under the radar of most investors and that is why I believe it is trading at a lowly valuation. But this is too my advantage. Buying a decent company at a low valuation will ensure that I get market beating returns from this investment.