Essentra (ESNT) 211p

Loss to date: -32%

Shares in industrial group Essentra (ESNT) jumped as much as 15% on 3 October on news the firm had agreed the sale of its filters business, completing its strategic repositioning.

Unfortunately, that still leaves them almost a pound below our 310p entry point in November 2021 despite the fact the firm has done exactly what it said it would.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

True to his word, chief executive Paul Forman has streamlined Essentra, turning it into a focused industrial component-maker with the disposal of two of its three divisions.

First, the packaging business was sold to Austrian firm Mayr-Melnhof, one of a handful of companies which dominates the sector globally, for £312 million in June.

This represented an exit multiple of 12.5 times enterprise value to earnings before interest, tax, depreciation and amortisation, a significant premium to the average multiple for deals in
the sector.

This week, the firm revealed it had agreed to sell the filters division to a private family office for an enterprise value of £262.1 million, completing its exit from two low-margin businesses and allowing it to concentrate on the high-margin components sector.

WHAT SHOULD INVESTORS DO NEXT?

There are several reasons to stick with Essentra now it is a pure-play business.

As a high-margin manufacturer Essentra should re-rate as it loses its conglomerate discount and trade on a higher multiple of earnings approaching those of rivals such as Diploma (DPLM) and RS Group (RS1), formerly known as Electrocomponents.

And after redeeming its debt early the firm will have no gearing which means free cash flow will increase.

Also, the company has promised to return £150 million or around a quarter of its market capitalisation to investors in the form of a special dividend which is an unexpected bonus.

Finally, having completed his mission to focus the group, Forman is leaving in January to be replaced by the current managing director of the components division, whose brief is to grow the business both organically and through acquisitions.

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