Given the potential for the Delta variant to interrupt the economic recovery and with prospects for inflation and slower growth weighing on market sentiment, this seems a sensible time to invest in companies that sell non-discretionary items, products that consumers have to use every day, in economic weather fair or foul.

One such business is Accrol (ACRL:AIM), the toilet roll, tissue and kitchen roll maker that looks well placed for profitable growth in a value-conscious, post-Covid world. Taking share in a market with defensive characteristics, Accrol is benefiting from the recovery of the discount retail channel, while new contract wins with grocers could leave consensus estimates looking too conservative.

Liberum Capital sees Accrol delivering strong growth in the year to April 2022 as the tissue market normalises and has a 95p price target on the stock, implying 87% potential upside from current share price levels.

ACCROL’S ON A ROLL

Accrol is a private label manufacturer that has restored confidence in its story following a damaging profit warning and share suspension back in 2017.

A complex turnaround has been effected under the leadership of CEO Gareth Jenkins, handed a full in-tray of problems in September 2017. In the period since, he has widened the customer base, made the business more efficient, rebuilt margins and dramatically
reduced debt levels among other key actions.

Today, Accrol has established a platform for growth with a whole host of retailers and Jenkins believes ‘the opportunities for a relentlessly efficient business, which delivers great-value products, are growing, as the world recalibrates in the aftershock of Covid-19 and consumers continue to move away from brands which offer little value’.

Accrol supplies toilet tissues, kitchen rolls, facial tissues, and wet wipes to leading discounters and grocery retailers across the UK: customers include Aldi, Lidl, Wilko, Morrisons (MRW), Tesco (TSCO) and B&M (BME) to name a few.

Following the recent acquisitions of Leicester Tissue Company, which brought scale to the tissue business, and John Dale wet wipes in North Wales, which added diversification through a new product range, the £160.7 million cap now operates from six manufacturing sites generating revenues totalling roughly 16% of the £2.1 billion UK retail tissue market.

WIPING AWAY THE COMPETITION

Results (14 July) for the year to April 2021 showcased Accrol’s resilience and revealed a business transformed, with Accrol delivering further strong margin improvements thanks to operational efficiencies as well as a return to dividend payments with a 0.5p payout demonstrating management’s confidence in future prospects.

Adjusted pre-tax profit almost doubled to £9.1 million despite the volatility created in the tissue market by the pandemic. And over the year Accrol’s market share rose from 13.1% to 15.9%. Sales and operations were impacted by the pandemic, yet annual revenues still edged 1.4% higher to £136.6 million for a third consecutive year of growth.

INVESTMENTS PAYING OFF

Encouragingly, Accrol has invested to bring the necessary scale and diversity required to push beyond being just an average tissue supplier. The benefits from the two recent acquisitions and operational efficiency projects are long term and the building of a UK paper mill should help reduce its exposure to cost fluctuations.

With scalable foundations for growth in place, and a strong market position, Shares believes Accrol is well placed to benefit from the anticipated recovery in tissue volumes as the effects of the pandemic unwind. Its position is particularly strong amongst the discounters, which have been recovering since Covid-related restrictions were lifted.

Accrol’s longer term growth is supported by the expansion of the major discounters through new store openings, while the launch of select products on Amazon, part of a push to capture the growth in e-commerce, certainly excites.

Input cost inflation is a concern, as is the strong bargaining position of its large customers, although Accrol swiftly and successfully raised prices to recover increased global pulp prices.

And having laid the foundations for growth, Jenkins wants to build a diversified group of size and scale that is focused on the broader private label personal hygiene and household products markets and less exposed to input cost fluctuations.

Accrol has capacity for £210 million of annual revenue from its current facilities, indicating that future cash generation is likely to be strong with relatively low capital expenditure requirements, meaning Accrol will be able to invest in growth whilst funding a progressive dividend.

For the year to April 2022, Liberum Capital sees pre-tax profits almost doubling from £9.1 million to £18.5 million, ahead of £21.4 million and £23.5 million in 2023 and 2024 respectively. Based on estimated earnings of 4.5p and 5.2p for this year and next, the shares are attractively valued on a forward multiple of 11.3, falling to 9.8 times.

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