What factors led to faster than the expected recovery of Polypipe Group PLC?

Summary

• Polypipe Group Plc has estimated its underlying operating profit to remain around £40 million for FY20.
• The Commercial & Infrastructural business segment has shown 1.9% growth for the four-months period ended on 31 October 2020.
• The Company has managed to deliver 8% year-on-year growth in its revenues for November 2020.
• The Board has cancelled the final 2019 dividend payment.

Polypipe Group Plc (LON:PLP) is the LSE listed industrial stock. Based on 1-year performance, shares of PLP have generated a return of about negative 6.86%. Shares of PLP were up by close to 0.39% from the last closing price (as on 15 December 2020, before the market close at 08:45 AM GMT).

Polypipe Group Plc is the FTSE 250 listed Company, which is the UK based manufacturer of plastic piping systems for residential, commercial and infrastructure sectors. The Company is a leading provider of sustainable water and climate management solution. The Company operates across 19 facilities and 20,000 product lines.

Plastic piping Industry Overview

Plastic pipes are an integral part of the construction industry and having various product segments like wastewater drainage systems, water pipelines, gas pipelines and HVAC systems. The plastic pipeline industry is well placed among rising demand for wastewater management in the industrial sector with government spending high amounts on pipeline installation. The critical driving market force for plastic pipe market would be the need of the pipelines in the housebuilding and construction industry. The Construction industry constitutes of the residential, commercial and industrial sector. The top 10 companies operating in this industry holds a major chunk of market share. The countries like the US, India and China contributes more than 50% market share in the construction industry.

Pre-Closing Trading Update (for 12-months ended on 31 December 2020, as of 14 December 2020)

• The Company has managed to deliver 8% surge in revenues for November 2020, in comparison to the equivalent period of the prior year.
• The Company is expecting its underlying operating profit to be approximately £40 million for FY20 ending on 31 December 2020.

Trading Update (for the four-months period ended on 31 October 2020, as of 17 November 2020)

• The Company has reported just 1.5% contraction in its revenue to £156.1 million for the four months period (from 01 July 2020 to 31 October 2020), when compared with the similar period of the prior year. The revenue for the ten-months period (from 01 January 2020 to 31 October 2020), was 18.0% lower than its prior year.
• The Company has reduced its net debt to £32.4 million as of 31 October 2020 due to strong trading performance.
• The Company is expecting capital expenditure of around £20 million to £25 million during FY20.
• The revenue for the residential segment has shown a significant recovery and delivered a 3.9% decline for the four-months period, while the decline was 28.1% year-on-year during H1 FY20 ended on 30 June 2020. The residential revenue was reduced by 18.0% for the ten-months period ended on 31 October 2020.
• The Commercial & Infrastructural business segment has shown resilient performance during the four-months period ended on 31 October 2020 and delivered a 1.9% growth from the equivalent period of the prior year. This business division has shown a decline of 7.6% in its revenue for the ten-months period ended on 31 October 2020, in comparison with the equivalent period of the prior year.

Recent News

On 23 September 2020, the Company has updated regarding the appointment of Kevin Boyd as a Non-Executive Director as well as the Chair of the Audit Committee with effect from 22 September 2020.

Financial Highlights (for six month period ended on 30 June 2020 as on 15 September 2020)

(Source: Company result)

• The Company has reported a contraction in revenue of 22.3% from £223.3 million during H1 FY19 to £173.6 million for H1 FY20 with an improving trend in July and August 2020.
• The underlying operating profit was plunged by 73.3% to £10.5 million during H1 FY20 from £39.3 million during H1 FY19 due to loss in volumes. Similarly, the underlying profit before tax went down by 81.5% to £6.6 million during H1 FY20.
• The Company has managed to reduce its leverage from 1.8x as of 30 June 2019 to 1.1x as of 30 June 2020.
• With regards to its financial position, the Company has strengthened its balance sheet by reducing its net debt to £71.2 million as of 30 June 2020, while it was £178.5 million as of 30 June 2019.
• The Board has cancelled final FY19 dividend which was due on 28 May 2020 and not announced any interim dividend yet.
• Cash generated from operations resulted in a net outflow of £15.7 million as of 30 June 2020.

Share Price Performance Analysis of Polypipe Group Plc

(Source: Refinitiv, chart created by Kalkine group)

Shares of Polypipe Group Plc were trading at GBX 511.00 and were up by close to 0.39% against the previous closing price as on 15 December 2020, (before the market close at 08:45 AM GMT). PLP’s 52-week High and Low were GBX 620.00 and GBX 372.00, respectively. Polypipe Group Plc had a market capitalization of around £1.16 billion.

Business Outlook

The Company will kickstart its new financial year with cautious optimism and a strong order book. The Company has strong medium-term fundamentals to look forward in FY21. The Company has highlighted the importance of dividend payment to shareholders and will consider payment of the final dividend in May 2021. The Company has upgraded its full-year profit guidance twice in a month.

The UK Government has made it clear that construction and housebuilding market won’t get impacted by an announcement of lockdown and continue to operate without any hassle. The Board is highly conscious of the broader macro related risk in the market. The Company has addressed the issue of uncertainty around the weak macroeconomic environment with rising unemployment would have an adverse impact on the Company in 2021. However, the housebuilding market has seen faster than expected recovery due to government assistance. The contractors have also started to fully operate to complete commercial and infrastructure projects.