Accrol and Pricing Power

I won’t be the first to comment on the events at Accrol (Kate Burgess covered it well for example in this mornings FT), but the surprise suspension of the shares from AIM on the 8th October caught a lot of investors by surprise. The latest announcement this morning said: “The Directors believe that the current challenges facing the Company relate largely to FY18 and are likely to have less of an impact on the Company’s trading performance in FY19. The Board are therefore confident that, whilst there can be no guarantee, a solution will be found to the Company’s short term funding requirements. The Directors continue to review the position and, as part of this review, the Company is engaging with its major shareholders and its bank.” 

To paraphrase the above, “we’re in a hole, our bankers are unhappy and we are talking to everyone about a way out but it may all come good in the end”.

To remind you Accrol (ACRL) is a company that listed on AIM in June 2016. The full year results published in July 2016 were very positive, but the Chairman also mentioned the following: “The listing has reduced the Company’s debt burden….” and “The listing also provided a partial exit for the founders, the Hussain family, and NorthEdge Capital who invested in Accrol in July 2014. The family will continue to support the management team as external consultants and I would like to thank both the Hussain family and NorthEdge Capital for their support and commitment”.

On the 7th September, the company announced the appointment of Gareth Jenkins as CEO to replace Steve Crossley “who is leaving the Company and stepping down from the Board with immediate effect….”.

On the 8th October, the company warned that profits were down, margins had fallen, debt was rising and the dividend was under review. In addition, it warned about a possible large fine over a Health & Safety issue that was apparently not disclosed in the listing prospectus.

Accrol processes paper rolls into toilet paper, paper hankerchiefs and kitchen rolls. It sits between the large paper mills and the large retailers who are their customers for “own-label” products. Now having looked at the prospectus back in 2016 it appeared the company was growing rapidly, albeit debt had been high, but I declined to invest in it. That was not just because I am very wary of all IPOs – these are events where the sellers have more knowledge of the product being sold than the buyers. For investors it’s rather like buying a used car. Is that newly polished vehicle a good runner, or is it a tired beast with hidden problems in the chassis? Only the seller really knows.

In addition, the company is “puffed up” to look attractive to the investors who take up such initial public offers. So my tactic is even if I like a company based on its prospectus, I would probably leave it for some months, or even years as good companies will likely remain so, to see how it fares as too many IPOs, particularly AIM ones, run into problems quickly. But there were several other aspects that concerned me about Accrol.

In this case, one of my other concerns was how defensible were its profit margins. In essence the pricing power of an intermediate processor, buffeted between the big supermarkets and the paper manufacturers is bound to be low. They may simply have been making hay while there was a surplus of paper being produced (paper production requires large capital investment, rather like steel mills, with long lead times on new plant so production volumes are lumpy as more capacity is built, or older inefficient plants are closed down). Paper is also a commodity product subject to the vagaries of commodity pricing.

This appears to be the source of their current problems, apart from the little (maybe big) issue of a possible large regulatory fine that will impact their cash substantially. Is this going to be another case where the investors launch legal action over the failure to disclose all the relevant facts in the prospectus one wonders?

Is my analysis of this company sound, or have I missed something? As Kate Burgess said in her article, “management will have a lot of explaining to do to investors” as will the Nomad no doubt (Nomad is Zeus Capital). With the shares still suspended, which always annoys investors and frequently leads to worse news in due course, there is not much investors can do at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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