Private Label Shift And Outsourcing Are Expected To Support Long-Term Earnings Power

Catalysts

About McBride

McBride is a leading pan European manufacturer of private label household cleaning and personal care products for major retailers and brand owners.

What are the underlying business or industry changes driving this perspective?

• Persistent consumer shift toward value ranges in essential household categories is supporting structurally higher private label penetration, positioning McBride, as category leader, to win incremental contracts and increase volumes, which is intended to underpin sustained revenue growth.
• Retailers and brand owners are accelerating outsourcing of production to specialist partners to reduce capital intensity and complexity, and McBride is already scaling contract manufacturing to a targeted 25 percent of sales, improving factory utilisation and supporting operating leverage and earnings.
• Ongoing innovation in concentrated formulations and lower impact packaging such as cartons, paper bags and compact powders aligns McBride with retailer sustainability agendas, which is aimed at securing premium listings on shelf and supporting mix led expansion in net margins.
• Group wide transformation, including SAP S 4HANA deployment, advanced data analytics and automation, is intended to drive measurable efficiency gains in procurement, manufacturing and overheads, with the objective of translating into a higher structural EBITDA margin and stronger free cash flow generation.
• Stronger balance sheet, lower net debt and reinstated dividend give McBride flexibility to pursue Core plus and buy and build initiatives in attractive product niches and geographies, enabling bolt on growth that is intended to accelerate revenue and enhance earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming McBride's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 4.1% in 3 years time.
• Analysts expect earnings to reach £39.4 million (and earnings per share of £0.2) by about December 2028, up from £33.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 7.2x today. This future PE is lower than the current PE for the GB Household Products industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained cost inflation in raw materials, packaging, labour and distribution, which management notes remains well above 2021 levels, could outpace McBride's ability to reengineer formulations and reprice quarterly. This could erode the currently elevated EBITDA margin and put long term pressure on operating profit and earnings.
• Private label market share has plateaued around 35.5% of volumes after several years of gains. If this tailwind has largely run its course, future growth will rely mainly on contract wins and share gains in a mature, price sensitive market, which raises the risk that revenue growth undershoots expectations and volumes stagnate.
• Growing dependence on contract manufacturing, including large low priced bleach contracts and a strategic target of 25 percent of sales from this channel, increases exposure to brand owners with strong bargaining power. This could compress net margins and limit the upside to earnings if pricing is kept on a strict pass through basis.
• The multiyear SAP S 4HANA upgrade and wider transformation program, with capital expenditure running above historic norms and expected benefits weighted to later years, carries execution and cyber security risks that could disrupt operations, drive higher than expected overheads and delay the anticipated GBP 50 million cumulative benefit. This could negatively affect free cash flow and profitability.
• Although leverage is now low and cash generation strong, management is actively considering dividends, acquisitions and other uses of capital. Any misallocation into low return M&A or automation projects with longer paybacks than anticipated could dilute the current 33 percent return on capital employed and slow growth in earnings per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.99 for McBride based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.35, and the most bearish reporting a price target of just £1.8.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £965.3 million, earnings will come to £39.4 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of £1.34, the analyst price target of £1.99 is 32.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.