McBride PLC

Cleaning product manufacturer with 66% ROE trading at 5x P/E.

This company came to my attention as it’s one of the largest holdings of David Waters’ Alluvial Capital. I usually prefer to invest in companies with solid track records. This one is more of a turnaround story. However the turnaround has already happened and is just not reflected yet in the share price.

---

McBride is the leading European private label producer of everyday cleaning products. The Company operates in five divisions: (i) Liquids (57% of group revenue, 8.6% operating margin). Includes laundry detergent, dish-washing liquids and surface cleaners; (ii) Unit dosing (25%, 8.3%). Comprises single dose cleaning products such as laundry pods and dishwasher tablets; (iii) Powders (9.9%, 6.5%). Includes laundry powder, dishwasher and water softener concentrates; (iv) Aerosols (5.4%, 4.1%); and (v) Asia Pacific (2.6%, 5.7%). Geographically, the main markets are the UK (20.8%), Germany (22.7%), France (21.6%), and Italy (8.4%). The Company supplies over 90% of top European retailers.

Financial Overview

Overall, the past decade has been a rough one for McBride, due to an intensely competitive retail environment and pressure from branded products. And Brexit didn’t help, impacting the logistics of the group. That led to continued pressure on the top line and margins. Management launched two successive restructuring programs (“Repair, Prepare, Grow” launched in 2015, and “Compass”, launched in 2020, which reorganised the business in the current five units); exited the loss-making Personal Care business in FY17; closed the UK aerosols business in FY20; and that resulted in a high level of exceptional costs during that period, which pressured the reported operating margin. The decline in revenue from these disposals and closures was partly offset by the acquisition of Danlind in FY18, a Danish producer of auto dishwash and laundry products, which had ca £58m in revenue.

To top it all off, in FY22 and FY23 McBride was impacted by high inflation notably in chemical feedstocks such as natural gas but also transport, labour and general supplies; and supply chain disruptions. As pricing was typically reviewed once a year, the Company was able to pass on price increases but only with a lag, resulting in losses in both years. Management partly fixed that issue by updating the frequency of its pricing reviews, which now typically take place on a quarterly basis, and taking other measures, such as commodity hedging where feasible.

And in FY24, the Company’s fortunes finally turned. Perhaps the key event is the high inflation from the previous years; while the direct impact on McBride was negative, the indirect impact is that it made consumers more price-sensitive and caused them to seek more affordable alternatives to branded products. And that also led to a change in consumer perceptions: advancements in manufacturing and quality control allowed the Company’s products to rival the quality of established brands. This resulted in volume increases over the past two years (+5% in FY23 and +6.6% in FY24). The change in perception should result in a durable shift to private label: why pay more for a branded product if a private label has the same performance. The below graph, taken from the Company’s latest Capital Markets Day presentation, shows the previous pressure from branded products, and the reversal in private label market share starting in 2022. Furthermore, McBride is growing faster than the private label market, with share gains across most geographies and all product categories.

The Company’s financial policy has also improved. Historically McBride didn’t pay dividends; instead it issued non-cumulative redeemable preference shares (“B shares”), which shareholders could then choose to redeem for cash; this is mostly what we can see in the above “share repurchases” line item, aside from FY21 and FY24 where there was a true share buyback. This unusual practice has now been discontinued and future dividends will be regular dividends paid in cash. B shares are accounted for as current liabilities and as at June 2024 had a book value of £0.7m - in other words, this oddity can now be ignored.

Net debt as at 30 June 2024 was modest and amounted to £131.5m, consisting of €175m RCF £55.6m drawn, a £11.8m overdraft, and £65m in secured loans. This resulted in a net debt / EBITDA of 1.5x (4.9x the previous year). McBride also operates a defined benefit pension scheme in the UK; it is closed to new members but has a deficit of £27.5m, which will require payments of £4m per year, in addition to a profit share up to £1.7m up to March 2028. The Company also has a small amount of leases (ca £8.4m).

Management & Ownership

The CEO, Chris Smith, was appointed on an interim basis in July 2019 and on a permanent basis in June 2020; prior to that he was CFO in 2015. He is described as having extensive experience in managing multi-site and multi-country organisations. The CFO, Mark Strickland, was appointed in May 2021 and has been involved in a number of business turnarounds / transformations. The heads of the various segments were also brought in from the outside around 2020-2021 to help turn around the business. The chairman, Jeff Nodland, was appointed in June 2019 and has previous experience in packaged goods and specialty chemicals. In summary - there is a new management team since around 2020, which seems to have successfully transformed the business, although that was masked for a while by the impact of high inflation in FY22-FY23.

Regarding ownership, there is no anchor investor. Top investors are hedge funds and investment advisors. Teleis Capital Partners, which manages a concentrated portfolio of small caps, is the top shareholder and owns ca 24% of the shares. The CEO and the chairman have stakes of ca 0.4%. While relatively modest (for the CEO, it’s the equivalent of one year of variable remuneration), it’s nice to see.

Prospects & Valuation

Management commentary is quite positive for FY25, citing higher volume levels, new product launches and business wins. Over the medium term, management is guiding for 2% revenue growth per year, and EBITDA margins of >10% of revenue (that would correspond to an increase of ca 100bps from 2024 - transformation programs are still ongoing). Nevertheless, a decade of under-performance has led to widespread cautiousness, with the shares trading at only ca 5x trailing P/E and EV/EBIT. Brokers are equally cautious and project a flat P&L over the coming years, resulting in forward P/Es of 5x as well. This is obviously not an equilibrium P/E multiple and it will have to be solved in one of two ways: either the share price increases, or the earnings decrease. If McBride shows just consistent performance over the coming quarters, the shares should re-rate. And if the Company’s performance weakens over the coming years, then hopefully the low starting P/E will limit the damage to the downside.

Conclusion

McBride is the leading European private label producer of everyday cleaning products, and benefits from the ongoing shift in demand from branded products to private label. Following a successful turnaround, the Company is currently highly cash generative and the shares trade at an undemanding 5x earnings, resulting in a good risk/reward.