Margin improvements under a winning transformation strategy and scope for growth are reasons to keep buying private label household-to-personal care products play McBride (MCB).

Investment bank Investec believes you could make at least 25% return over the next 12 months, based on its 250p price target.

The £356m business develops and supplies products for sale under retailers’ own brands, often referred to as private labels or own labels. These span everything from toilet cleaners and laundry products to shower gels and toothpastes and are supplied to Europe’s leading grocery retailers.

‘Repair, Prepare, Grow’ strategy

Under chief executive Rik De Vos, Manchester-headquartered McBride is successfully progressing its ‘Repair, Prepare, Grow’ strategy to simplify the business and return it to sustainable growth.

It previously struggled with poor quality products, too many customers and too much debt.

McBride now appears to be in a better place despite input cost inflation, promotional retail markets and increased competition in France and Germany.

We highlighted the attractions of McBride at 150p in the 21 July 2016 edition of Shares and the stock has subsequently enjoyed a good run. We still see significant upside.

Margins are improving following completion of the ‘Repair’ phase, while McBride is now executing its ‘Prepare’ phase, which will bridge the path to the ‘Grow’ stage.

Full year results on 7 September revealed headline sales up 3.6% to £705.2m, boosted by a translation gain on weaker sterling.

At constant currency, revenues were 5.9% lower, a consequence of deliberate customer rationalisation, price deflation and increased competition in some markets.

Encouragingly, operating margins increased to 5.9% (2016: 5.3%), moving towards management’s 7.5% target thanks to cost reductions and efficiency improvements. Return on capital employed rose from 23.4% to 27.7%, within De Vos’ stated 25-30% target.

Fiscal firepower

Significantly, net debt reduced from £90.9m to £75.7m and is still expected to reduce despite higher capital expenditure at key sites in the years ahead.

McBride, which has halted the sale of its aerosols business, has firepower for acquisitions. We like the rationale behind its £39m acquisition (4 Sep) of Denmark-based Danlind, giving McBride exposure to the fast-growing dishwasher tablets market and access to a range of Nordic customers.

McBride looks good value on a prospective price-to-earnings ratio of 12.2 and 2.5% dividend yield, with the earnings multiple dropping to 10.4 times on 2019’s estimates.

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