Some teething problems in streamlining three of its businesses under a new divisional structure saw specialist plastics products company Synnovia (SYN) add a cautious note to its Trading Statement issued in mid-February.
The current year ends at the close of this month and the company’s view seems to be that it will not be knocked off track too much and should be close to market expectations, going for some £4m pre-tax.
Synnovia is a niche manufacturer of specialist plastic products. Applications for these products vary widely and examples include:
Packaging for the food manufacturing and distribution sectors – it manufactures films, sacks and pouches for food ingredients, meat and fish processing;
Steering columns and instrument control knobs for the automotive industry – plastic bearings for conveyors;
Hydraulic and industrial rubber hose manufacture – various types of mandrel (a long high-spec rod used by hydraulic hose manufacturers), for hydraulic, industrial and automotive hose products;
Cardboard box manufacture – creasing matrices for manufacturing lines for cardboard boxes, corrugated boxes, and for die makers.
The business operates through two divisions, Films (contributing 53% of sales) and Industrial (producing 47% of sales) and has the majority of its production in six UK based factories, with a further two factories – one in Thailand and another in China, it also has one factory in the USA. It has sales offices in the USA, Italy, Japan, India and China.
Approximately 50% of its £83m sales are made outside of the UK to more than 80 countries around the world.
The company was established in December 2002 as Plastics Capital. Since then it has grown mainly through acquisitions. It was listed on the AIM market in London in December 2007. The group only changed its name to Synnovia in late December 2018.
Over the last five years the group has seen its revenue grow from £32.46m in the 2013/14 year up to £76.73m in the 2017/18 year. However, during those same years pre-tax profit performance has been less than sparkling rising from £3.59m to £4.18m.
Revenue has continued to grow strongly during the 2018/19 year, which has not yet translated into the profitability growth. In part that was due to its ongoing hedging policy, which has negated an improvement that would have arisen from the US$ strength versus sterling over the period.
Another drag on any profits growth was due to cost pressures and unforeseen minor delays to the addition of new capacity in the group’s Films Division.
Pleasing to note was that the Industrials Division continued to perform well. Bearings sales have grown significantly over recent months, exceeding expectations and this growth is expected to continue over the next few months. It continues to add new business and now is considering future capacity expansion through a move to a new production facility in Thailand.
Matrix activities continue to make good progress over prior year in line with its strategy of getting "closer to the customer" and broadening the range of die-cutting and die-making consumables that the group has to offer. Restructuring the management team in China is expected to strengthen sales and operational capability. The company has also implemented a series of improvements to strengthen performance of its US distribution business.
Mandrel sales have recovered somewhat from the temporary reduction that was experienced in Q2/Q3 of the financial year, partly driven by new business wins.
The Films Division is having a challenging year coping with capacity constraints during the year, continuing strong growth and as management continue to integrate the three former separate businesses. Revenues in the Film Division have so far increased by 10% and in parallel they have implemented significant projects to add capacity and capabilities, including additional extrusion lines, an eight-colour printing press, new conversion machines, recycling equipment and warehousing infrastructure. All this should put it in a very good position for continued sales growth.
There have been some delays and teething problems with those projects which were expected to be largely complete in Q3 of the current financial year. However, most of these projects are now expected to conclude in Q4.
Meanwhile, staff levels and training have been increased, whilst sales conversions have been held back until the capacity is in place. Costs have therefore risen ahead of revenue, negatively impacting profitability.
Chairman Faisal Rahmatallah, stated that:
"Significant organic growth continues to be achieved across both our Divisions. We continue to implement a programme which adds capacity to fulfil this demand and to enable future growth thereafter.
Relatively small delays to this programme have been experienced in the Films Division and will restrict profit growth in the current financial year. Except for this disappointment we are satisfied with the progress the Company is making this year.
The change of the Company's name to Synnovia plc has seen a smooth transition and is acting as a strong signal to our organisation to do everything reasonably possible to reduce, recycle and re-use plastic waste.
Overall, we anticipate that our financial performance over the second half of the financial year will enable us to announce results that are broadly in line with market expectations."
Despite increasing sales it is very evident that profits are still a strain. On the face of it there are limited investment attractions to this stock and the shares, now 102p, are not for chasing until good profits start showing through – however tucking a few away on ‘off days’ could well pay off for patient holders.