Full year results from foams manufacturer Zotefoams show the early benefits of the contract to supply high performance foam materials to Nike for some of its sports shoe ranges. There are growth prospects across the Zotefoams product range, and this should ensure significantly increasing profit over the next few years.  

Nike is rolling out a number of products that use the company’s high performance foams, which can be formulated for specific needs, and additional products are likely to be added but the timing is uncertain.

This has propelled the growth in the high performance foams division, but there is growth from insulation products, as well as other foam materials. Additional capacity is being installed across the product ranges because of the growing demand.

Premium listed Zotefoams has been manufacturing cellular foam materials for nearly a century. It is the world’s largest maker of lightweight cross-linked polyolefin block foams under the Azote brand, as well as high performance foams.  

Zotefoams is an international business with a wide customer base. Product protection is the largest generator of revenues, followed by transport, sports and leisure and construction.

2018 figures

High performance foams generated 27.1% of group revenues, up from 18.7% in 2017, and it has higher margins. Azote sales also grew but their contribution dropped to 70.5% of revenues.

Zotefoams reported record profit and revenues in 2018, thanks to the higher sales to Nike and the additional capacity in the US from earlier last year. Revenues grew from £70.1m to £81m and pre-tax profit rose from £9.2m to £11.1m. The dividend was increased from 5.9p a share to 6.1p a share.

MuCell turnaround

The performance would have been better if it had not been for MuCell, which has developed technology for greener, lower cost plastic products with micro-bubbles, increasing its loss. MuCell generates revenues from equipment sales, but the long-term strategy is to build up licence revenues.

MuCell is expected to make reducing losses but if it can be turned around into profit more quickly this will provide a further boost to the group performance.

Capex

Last year, Zotefoams opened a new facility in the US and the capital spending is going to be even higher this year with £30m pencilled in by analysts. This includes further expansion of the US plant, but the main spending is a total of £23m on a new factory in Poland, that will not open until 2020.

There will also be capital investment on the Croydon factory to increase high performance foam expanding capacity before the end of 2019. These investments increase the cost base in the short-term and the benefits will take longer to show through.

This investment means that net debt will increase from £13m to £32.5m this year. The underlying operations are cash generative and the debt should almost halve over the following two years.

Future

This year has started strongly. Pre-tax profit is forecast to improve to £12.6m in 2019 and then rise to £15.2m, followed by £18.7m in 2021.

At 610p, the shares are trading on 25 times prospective 2020 earnings, while the forecast yield is 1%.

Zotefoams appears fully valued at its current share price, but it has excellent long-term prospects and is a leader in the cellular materials market. The Nike relationship will develop further. It is worth keeping an eye on the shares and buying on weakness.