Materials technology firm Zotefoams (ZTF) is one of our top picks in the chemicals sector thanks to healthy profit margins and strong investment in the business to keep it competitive.

Zotefoams manufactures lightweight polyolefin foams and sells high performance products. It also licenses its MuCell technology to deliver stronger and more cost-effective packaging.

The £145m cap business plans to expand its US facility in Kentucky, which is anticipated to start-up in the final quarter of this year, increasing global capacity by 20%. Extra capacity will be used to service existing demand and can be doubled or even trebled, according to the company.

It is also pouring money into technology enhancement and product range expansion to encourage further growth.

In the first half of the year, Zotefoams reported sales growth across all divisions including sales in its MuCell division surging 77% to £1.96m, driven by its largest individual equipment order to date.

Investec analyst Thomas Rands is impressed with the latest update (8 Aug), highlighting that ‘long anticipated growth’ is starting to emerge in the polyolefins and high performance product (HPP) divisions.

Polyolefin foam sales grew by 8% in the half year period. They account for approximately 80% of overall revenue. That was thanks to strong volumes, higher selling prices and investment in Zotefoam’s Midwest facility.

In HPP, revenue rose 40% in constant currency thanks to a strong ramp-up in foam sales for sports equipment, as well as significant growth in insulation products.

Zotefoams hopes to continue its impressive performance by taking advantage of key trends by using fewer materials and making its product range more lightweight.

The company plans to tap into high growth markets such as high performance packaging materials for the aerospace industry and focus on application-specific products in different parts of the world.

For example, demand for high performance materials is expected to grow in Asia, while India will require products to improve ventilation as the country’s focus on pharmaceutical production intensifies.

N+1 Singer analyst James Tetley is impressed by Zotefoams’ performance as the firm reached 48% of his forecast pre-tax profit of £8.4m in the first half of 2017. He believes profit will jump to £10.4m by the end of 2018.

Tetley also reckons the MuCell division has significant potential as it can speed up the conversion of royalty generating customers.

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