BPI prepares assault on new high

Making bread bags and packaging for Haribo sweets is good business. British Polythene Industries has grown in each of the past seven years, and now we're told the first quarter of 2016 has beaten forecasts. It's been volatile this year, but investors have chased the share price up as much as 8% Wednesday, possibly setting up another assault on record highs just north of 750p.

"Trading performance in the first quarter has been strong and ahead of management's expectations, having benefited, in particular, from lower energy costs and favourable currency translation effects," explained the Scottish firm. It's also confirmed a profit of £5 million on the sale of its Chinese plastic bag business for £9.4 million.

The cash will be used to shrink BPI's growing debt pile, which had increased to £32.1 million at 31 December after an £11.2 million pension contribution. Management also reckon this year's free cash flow will help.

Launched in 1993, BPI China was initially set up to make low-cost carrier bags for UK retailers, but diversified after the bag business was sold in 2002. Following heavy investment in printing and equipment for the Australasian market, sales at the loss-making subsidiary reached just £9.6 million in the year to 31 December, with nearly two-thirds of this revenue coming from the UK office.

Although BPI admits it got its pricing forecasts "spectacularly wrong" last year when group sales slipped 6% to £468 million, the packaging maker still grew pre-tax profit by 4% to £23.1 million after restructuring, borrowing and hefty financing costs. With outperformance in the UK, Europe and North America, basic earnings per share (EPS) rose 8% to 66.2p.

We flagged back in February, with the shares at 690p, that restructuring benefits, foreign exchange tailwinds and opportunities for underlying growth could drive outperformance this year. And BPI is a step closer to broker Investec's £10 target price.

Excluding the contribution from the Chinese disposal, Investec reckons sales will reach £478 million this year, with pre-tax profit growth of 7% to £29.4 million taking EPS to 78.3p.

Shooting back through its 200-day moving average, BPI shares rallied to an intra-day high of 735p on Wednesday before slipping back to 725p by late morning, still up 5%. Even now, a price/earnings (PE) multiple of just 9.4 times looks modest.

Since full-year results late February, the shares have surged 12% and are heading back towards 750p resistance. There have been a number of breakout attempts over the last year, but none have been able to stick.

With proof in the bag that BPI can deliver against a backdrop of volatile polymer prices, foreign exchange headwinds and reduced volumes, and the uncertainty surrounding its small Chinese subsidiary dealt with, it will be interesting to see if the shares have staying power this time.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.