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Thrace Plastics | Oversold fundamentals

A tough 2022… – 2022 was a challenging year for Thrace, as the top line rolled down, largely driven by low demand across Europe, and sales and profitability normalized due to the payback in demand for health care products (PPE), following the temporary COVID boost over 2020-22, while also hit by significant raw material inflation. This was evident in the FY results, with sales -8% yoy landing at €394m and EBITDA -54% yoy at €48m (including some €5-6m from PPE). PBT shaped at €32m, or €22m underlying (namely ex €4.6m one-off gains and €5.3m PPE profit). Despite the significant yoy drop, underlying profitability stood materially higher than 2019 levels.

… followed by moderate underlying profitability growth in 2023e… – In the light of the softer demand backdrop and relatively limited near term visibility (smaller/more frequent orders placed) as well as elevated costs and a rather tough pricing pass through, we have lowered our underlying 2023 EBITDA estimate, now eying €46.7m, indicating a healthy 9% yoy growth on an underlying basis (namely excluding the estimated contribution from PPE in 2022 EBITDA). We model a low c3% yoy volume growth, on further declining prices, thus expecting a c1% yoy drop in 2023 revenues to €389m. We reckon this is quite a conservative estimate with upside risk to the demand backdrop, but at this stage, we prefer to err on the conservative side.

… and low teens EBIT CAGR looking ahead – For 2024e we envisage sequential improvement, as the pendulum of operating leverage turns positive on abating input cost headwinds. As such we forecast EBITDA near €50m, pointing to another c7% yoy growth. Looking further out we believe that Thrace will navigate the challenging backdrop and emerge stronger leveraging on cost efficiencies and volume growth thanks to its strong market positioning, healthy balance sheet and growth investments. We calculate 2023-28e EBIT CAGR at 13%, with the respective margin rising >9% (a further c3pps boost), almost double the 5% in the pre-covid era.

Healthy balance sheet and lower capex envelope to drive rising cash returns – The strong cash pile-up during 2020-21, boosted by COVID-related demand, helped Thrace reduce leverage while also maintaining optionality regarding shareholder returns and investments. Following c€97m spent in 2020-22, we expect the capex envelope to trend down (€30m in 2023e and €20-25m in 2024-25e) in the coming years. In the meantime, Thrace remains strongly committed to sustainability, testament to which the ‘Platinum’ 1st ESG ranking for the group in Forbes Top 100 ESG transparency index. We believe it is reasonable to expect the group will continue driving shareholder value in the future in sync with growth in underlying profitability.

Valuation – We have recalibrated our model filtering through our updated estimates and a slightly higher WACC (9.3% from 9% previously) owing to the tighter monetary policy settings. We come up with a valuation range between €320m and €440m, with our baseline pointing to a 12m intrinsic value of €8.5/share, indicating notable upside, despite our conservative estimates. The current price reflects a rather pessimistic setup for the group, which has a proven solid track record of returns.