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Accrol Group Holdings plc

Accrol Group Holdings Plc Trading update

Accrol Group Plc Holdings (LON:ACRL)has issued a trading update this morning, confirming that external macro-economic factors have continued to adversely impact the business. Whilst the company continues to make operational progress, the continued weakening of Sterling against USD since September 2018 and increasing tissue prices have impacted profitability considerably. We update our forecasts to reflect these additional costs and note the new outlook for adj. EBITDA for 2019E falls within existing banking covenants.

Trading update: Accrol has released a trading update confirming that continued macroeconomic headwinds in the form of adverse FX movements and increasing tissue costs have had a considerable negative impact on the group’s profitability in 2019E. While the cost environment remains challenging, the group is making progress with the operational restructuring, delivering like-for-like sales at record levels (excluding the AFH business), addressing internal cost issues and customer price increases.

Key drivers: As previously highlighted the group’s profitability is sensitive to a number of external macro-economic factors, including the Sterling to USD exchange rate and parent reel costs (which are USD based). The group estimate an additional £3.5m of input costs as a result of adverse movements in both of these, which we factor into our forecasts. The group also expects exceptional cash costs relating to the restructuring program to be c.£7m for the full year (vs. £3.0m assumed previously) which we also factor into our forecasts.

Forecast changes: We update our forecasts to reflect higher input costs in 2019E. We update our revenue assumptions to reflect latest guidance and now expect adj. EBITDA of £1.0m in 2019E (vs. £4.6m previously). We leave our forecasts for 2020E and 2021E unchanged reflecting the annualisation of cost savings achieved to date, albeit clearly macro uncertainty remains which could put these at risk. We have also factored in an additional £4.0m of exceptional costs, relating to the restructuring program. As a result, we now expect net debt at the end of 2019E of £29.6m going to £25.6m in 2020E benefiting from better than expected working capital management, which we factor into our forecasts.

Investment view: Clearly macro headwinds have continued to impact near term trading and have proven to be a persistent challenge for the group. While this is a disappointing update we believe the group has made good progress with the restructuring programme which should benefit profits as cost savings annualise over the next financial year. We believe Accrol remains well positioned to benefit from the continued growth of discount retailers and has significant opportunity across the wider retail segment. In our view this continues to carry long term strategic value that should be unlocked as its recovery builds momentum post 2019.