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Thrace Plastics | Navigating uncertainty towards growth

2023: Better finish to a challenging year with strong cash flow – In a year characterized by subdued demand, Thrace managed to increase underlying EBITDA by 2.5% yoy to €44m, which was a bit better than our expected figure (€42m). Group turnover was down -12% yoy (€345m), driven by soft volumes (+0.5% yoy) and lower sales prices, while cycling a tough comparative vs 2022. On an underlying basis, namely excl. PPE, 2023 PBT shaped at €20.2m, down by c€2m, quite respectable performance in our view. Cash flow generation was the key highlight of 2023, with Thrace delivering €19m equity FCF despite €30m capex, aided by the unwinding of working capital. Net debt was reduced to €16m, even after €14m in dividends.

Heading for c6-7% growth in 2024, with risk on the upside we reckon – Starting from a lower base and maintaining our assumption for a gradual top line recovery pace in the light of the precarious backdrop, we have maintained our EBITDA forecast for €46.6m in 2024, +6% yoy. This will be driven by a 6% yoy rise in revenues (€367m), mainly volume-driven, stemming from the recent year’s capex (value-adding products, enhanced conversion capabilities and capacity expansion). We believe our estimates are by no means aggressive, implying upside risk on rising demand.

Medium-term growth prospects remain intact; we see mid-teens 3-yr EBIT CAGR – Looking further out, we believe Thrace remains well positioned to leverage on cost efficiencies and volume growth. We believe there is ample room for demand pick-up, which would manifest in even greater operating leverage than our numbers envisage. For 2025-26e, we model c4-5% annual volume growth leading to 6-7% revenue upswing. Assuming moderate raw materials inflation and improving mix dynamics, we come up with an EBITDA margin >14% by 2026. This corresponds to c15% 3-yr EBIT CAGR, on c6% revenue CAGR, quite a compelling proposition.

Healthy balance sheet despite ongoing investments – Despite the challenges faced, the group has maintained its healthy balance sheet (2023 net debt/EBITDA c0.4x) while implementing c€30m of investments in 2023 (with focus on sustainable development) and distributing c€14m in dividends during the year. Thrace has invested c€150m in the past 5 years, in sync with its strategy for growing the business, while it has returned almost €45m to shareholders and has produced €300m EBITDA (€84m of which in PPE products). With FCF conversion set to average c50% in the coming years on our estimates, we believe Thrace is well placed to continue combining growth with shareholder returns, while driving an enhancement of returns on capital to 2-digit levels by 2026e (pre-tax).

Valuation – We recalibrate our valuation filtering through the modest changes to our estimates and come up with a fair value range between €314m and €424m. Our baseline points to a 12-month intrinsic value of €8.2/share, indicating significant upside vs the current price. We reckon current levels mirror a pessimistic setup, with immaterial profitability growth, i.e. EBIT of €20m, >35% below the levels we consider feasible by 2026e even as demand bounces back, which is inconsistent with the group’s solid track record and growth investments.