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New factory and contract wins to lift RM2
Imminent news from pallet maker RM2 International (RM2:AIM) could help it regain the market’s interest. Buy at 27.5p.
The £110m business looks to have fixed its problems and should soon announce its lower-cost production line in Mexico is up and running.
It has also bagged contracts with big names including Unilever (ULVR) and Nestle (NESN:VTX).
What does it do?
RM2 has devised a more durable glass fibre and resin pallet which lasts longer than traditional wood products, many of which break after a few trips or are riddled with bugs. It currently has 500,000 pallets deployed in the market.
The company floated in January 2014 with half its market cap in cash and board members including former Diageo (DGE) boss Paul Walsh.
Last year RM2 said customer feedback had prompted it to change the friction coating method from powder to a gel-based system. This would make it better for health, hygiene and safety needs.
The company then admitted it wasn’t cost effective to manufacture pallets in Canada, despite having already built a large factory. Unsurprisingly, the share price collapsed.
‘We over-estimated the ability to mass produce at a reasonable price,’ confesses chief executive John Walsh in an interview with Shares.
How has it fixed the problem?
RM2 struck a deal with two well-known manufacturers to set up new factories on its behalf in Mexico and China, taking equipment from its Canadian plant.
‘We didn’t develop a fully automated production process. It wasn’t cost effective to have human intervention in Canada, but it does work in Mexico and China where labour is cheaper,’ explains Walsh.
Mexican production could become live within the next two months, we understand. Chinese operations should follow in early 2017, although there have been delays importing the kit.
A deal has been struck with AT&T (T:NYSE) to install chips in pallets so customers can track and trace their goods in transit.
Walsh believes earnings visibility will soon improve as it keeps winning new business. He hopes by mid-2017 to be able to tell the market how new pallets will be deployed out to the end of 2018.
RM2 expects to rent out 85% of its pallets on three to five year agreements and sell the remaining 15% of production.
Key risks include further delays to the Chinese plant start-up, potential fundraising and slow pace at which contracts are fulfilled.
The business hasn’t been very transparent in the past with contract awards, so it must improve communication. (DC)
RM2 International (RM2:AIM) 27.5p
Stop loss: 19.25p
Market value: £110m