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Thrace Plastics | Resilient in a precarious backdrop

Protracted low demand makes a challenging near-term backdrop… – Subdued demand has aggravated the near-term challenges for the group, as was evident in the H1’23 results, with group turnover -15% yoy and underlying EBITDA (adjusted for PPE products profitability in H1’22) down by a lower c5% yoy to €24m (-20% reported). The revenue drop was driven by both lower volumes and pricing (caused by raw materials price fall), with the protracted slow demand further exacerbated by the effect from the tough comparative. That said, the underlying performance of the group is better than the optics suggest, as the current year is the first with no extraordinary contribution from PPE products. On an underlying basis, namely excl. PPE, H1 PBT was down c€3m, still quite a respectable performance in our view.

… leading to moderately lower forecasts; 2023e EBITDA still >35% higher than pre-covid figures – We trim our 2023-24e EBITDA forecasts by c6-9%, in the light of the challenging industry backdrop, which we see stretching though to H1’24. We now forecast 2023 EBITDA of €42m, a tad lower yoy on an underlying basis (namely excluding the contribution from PPE), which is quite commendable given the demanding environment. This will be driven by a c7% yoy drop in 2023 revenues (€366m) stemming from a c3% decline in 2023e volume weighed further by price/mix. We assume a recovery in volumes in 2024, albeit on sustained price deflation, thus ending up with c2% revenue growth next year. Despite the tepid top line, we stress that underlying profitability remains materially higher than 2019 levels, with 2023-24e EBITDA at €42-47m vs €29m in 2019 reported figures.

Solid medium-term growth prospects with mid-teens EBIT CAGR – Looking further out, Thrace looks well positioned to successfully navigate through the precarious backdrop, leveraging on cost efficiencies and volume growth thanks to its strong market positioning and growth investments. As such, we calculate 2024-27e EBIT CAGR at 15%, on >5% revenue CAGR, with the respective margin rising towards 9%, almost double the 5% in the pre-covid era.

Balance sheet optionality; investment plans intact – The strong cash pile-up during 2020-21, boosted by COVID-related demand, has helped Thrace further bolster its financial position. Despite the challenges faced, the group has maintained its healthy balance sheet (2023e net debt/EBITDA c0.6x) while endorsing investments (with focus on sustainable development) and rewarding shareholders. On the latter, Thrace has paid c€11m (€0.26/share) in dividends in 2023, while also announcing an interim dividend of €0.07/share (ex-date 30-Nov). With FCF conversion at c50% post 2024, we believe Thrace will drive shareholder value in sync with profitability growth.

Valuation – We recalibrate our estimates and come up with a valuation range between €313m and €426m. Our baseline points to a 12month value of €8.2/share (from €8.5 previously), indicating significant upside to the current price. We reckon current levels mirror a pessimistic setup, with immaterial profitability growth even as demand bounces back, which is inconsistent with the group’s solid track record.