Daily ShareChat: Nuplex Industries

By Jenny Ruth

Friday 16th April 2010

Resins manufacturer Nuplex benefited from strong margin gains in the six months ended December because of the raw materials tailwinds in 2009 but those gains could unwind in 2011, says Dennis Lee, an analyst at Craigs Investment Partners.

Nuplex's EBITDA (earnings before interest, tax, depreciation and amortisation) margins expanded by 420 basis points in the six months ended December which Lee doesn't think is sustainable.

Since the end of December, "the average raw materials cost has risen 15% while product pricing continues to be hampered by the low industry utilisation rate, currently about 75%," Lee says.

"Unless we see a strong macro recover, the volume run-rate will start to normalise as restocking activity and government stimulus roll off," he says. The company's regional diversity should help cushion it against some of the margin erosion.

Lee is forecasting Nuplex's 2011 earnings will be flat, reflecting the benefit of better cost absorption after restructuring.

He views Nuplex's acquisition of Med-Chem as "an excellent bolt-on acquisition" which is likely to add 2.1 per cent to 2011 EBITDA. The undisclosed price is unlikely to have exceeded $10 million which implies a three-year payback.

While he sees little near-term upside potential for Nuplex's share price, "the downside also looks limited."

BROKER CALL: hold

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