About a year ago The Armchair Trader wrote that James Cropper LON:CRPR, the AIM-listed, Cumbria-based paper production company was undergoing a transition year as it was struggling with inflation-fuelled rising costs.
We followed-up in November when the publication highlighted a new direction that Cropper was looking at through the acquisition of TFP Hydrogen, which took the 180-year-old paper company into the Defence, Aerospace, Automotive and Construction sectors, through TFP’s manufacturing lines of membranes, carbon veils and mats for hydrogen fuel cells and other industrial uses.
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Cropper’s share price had been in the doldrums for some time, as reported. How has the last year treated the firm? Well, the market has not been convinced by Cropper’s new direction. A year ago, Cropper’s shares were trading at 845p. This morning (23rd July) Cropper opened the day trading at 301.5p, and on publication of its results had fallen to 280p, down 66% over one year. Since our last article Cropper is down 63%.
Higher energy costs, lower demand
The Cumbrian company published an underwhelming set of results as it was still grappling with high energy costs (paper production is quite an energy-intensive business) and lower market demands, which contributed to a 21% fall in revenues year-on-year to GBP103m.
This fall in revenues flowed through into a fall in profits, which were reported at GBP2m operating profit and GBP800,000 PBT, down 58% and down 75% respectively. However, reported profit before tax was better than management expected.
Significantly, Cropper did have some hefty costs in the year: GBP5.3m of exceptional items which included restructuring costs of GBP2.3m, and a non-cash impairment charge of GBP4.4m. However, Cropper did get some money back by way of a GBP1.4m credit due to the settlement of a pensions-related legal claim.
[bridgewise report=”overview”]LSE:CRPR[/bridgewise]Once these exceptional costs were accounted for it led to a reported loss before tax of GBP5.3m, a big negative turn from a GBP1.3m profit in 2022/23. One of the issues that Cropper highlighted a year ago was the high interest rates, and the paper company took action to reduce its net debt y-o-y from GBP16.6m to GBP15.5m. The company also cut its capex by GBP2m to GBP3.8m to mitigate weaker trading conditions.
Overall, Cropper saw a basic and diluted loss-per-share of 41.8p. The company withdrew its dividend, offering shareholders a total dividend for the year of 3p/share, down 3p from the total dividend for 2022/23 of 6p/share.
Bridgewise still sees Cropper outperforming
Although Cropper’s latest set of results was disappointing, Bridgewise, the AI-powered stock analyst, rates Cropper as ‘Outperform’. Bridgewise said: “Analysing past performance, stronger relative performance in these metrics has often been associated with a higher likelihood of a company’s stock outperforming industry competitors. Taking into account James Cropper’s recent financial performance, the company’s stock seems to offer a promising investment opportunity in the Paper & Forest Products industry.”
So, according to Bridgewise, Cropper is performing better than its peers in the Forestry & Paper Sector, which is a sub-sector of Industrial materials and part of the Basic Resources supersector. Moreover, Cropper’s bankers still have faith in the paper manufacturer, renewing their banking agreements with the Kendal-based company last month.
The company operates two divisions: Advanced Materials, of which TFP is part, and Paper and Packaging. Advanced Materials saw a contraction in revenue during the year, as the fuel cell market slowed down. However, TFP was happy with its hydrogen electrolyser business. Here, despite delays in expected projects it managed to win new clients and trials. It has been investing in the division, including appointing a new divisional managing director. Management thinks that over the medium-term, prospects for the hydrogen and the non-core Advance Materials business are strong, especially with an expected increase in Aerospace and Defence sectors.
Destocking cycle coming to an end
In Paper and Packaging Cropper says that its clients are still destocking, and the restocking of warehouses have been delayed by many clients as inflation has pushed up costs which stayed customers’ hands. That said, Cropper says that it has retained many of its existing customers, and believes that demand will start picking up, and with higher margins, will start positively contributing to profits. Management said: “The future project pipeline is encouraging and forward indicators, such as order intake, point to early signs of market recovery throughout FY2025.”
Steve Adams, Cropper’s CEO said in a statement this morning: “After a strong first half that showed continued momentum on the previous year, difficult market conditions during late 2023 and early 2024 across both businesses required a concerted effort to protect prices and margins and to focus on productivity and cost savings. This was achieved whilst also concluding the significant restructuring of our Paper and Packaging business and adopting a completely new continuous running operating model for the first time.”
Cropper has been through the (paper) mill in the last two years, something that has been reflected in its share price. That said, in this fallow time Cropper has made significant changes to its operations and is integrating TFP into the group, which gives it another set of products and USP in industries that are set to grow in the next five-to-ten years.
Cropper has undoubtedly faced a challenging year, with a perfect storm of economic headwinds impacting its core business. While the transition to a more diversified business model through TFP is a promising long-term strategy, the company must now navigate the short-term challenges and restore investor confidence. With a strong balance sheet and a clear path forward, Cropper may yet emerge from this turbulent period as a stronger and more resilient business.
