Investments are no barrier to profit for Zotefoams

Zotefoams (ZTF) reported sold progress in the first half, recording double-digit increases in revenue and profit.

Its high-performance products (HPP) arm did as well as its name implies, increasing its top line by 37 per cent to £36.1mn, or around half of the company’s total sales. This was driven by what new chief executive Ronan Cox described as “exceptional demand” from Nike, for whom it exclusively produces foams for running shoes. Its strength offset weakness in the polyolefin foams business, which saw sales drop by 9 per cent to £34.4mn. 

The company is continuing to make big investments – capital expenditure trebled to £8.1mn in the half-year and net debt rose by £13mn to £44.6mn – although this is largely due to the agreement to license technology from China’s Shincell in May, which falls under lease accounting rules.

It also continued to invest in the development of Rezorce – the monomaterial being trialled as a barrier for juice cartons that could make them 100 per cent recyclable.

Cox said the Shincell deal allows it to profitably produce both larger and smaller products of different shapes at smaller batch sizes, opening up new markets. But it is the excitement around Rezorce that has pushed the company’s shares up by more than 50 per cent year-to-date given the trial announced with Dutch packaging giant Refresco and the potential market opportunity.

The shares are more expensive than they were at almost 23 times forecast earnings, and the potential of a big re-rating if Rezorce takes off needs to be weighed against the balance sheet hit it would suffer if it doesn’t and capitalised development costs have to be written off. We err on the side of caution and move to hold.

Last IC View: Buy, 346p, 19 Mar 2024