Essentra jumps on plan to become pure play components business, Q3 sales grow over 5%

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Shares in Essentra PLC (LSE:ESNT) rose nearly 5% as the company announced that it is refocusing its strategy to become a pure play components business over time.


As a first step in the new strategy, it will review all options for its filters division, the company said in a statement.


A trading update accompanying the statement revealed like-for-like (LFL) revenue growth of 5.1% in the third quarter compared with the same period last year, although sales fell by 2.2% compared with pre-pandemic 2019.


Essentra said it expects adjusted operating profit for the full year to be within the range of analysts’ forecasts.


The group said its three businesses – components, filters and packaging – all have strong prospects and the potential to deliver compelling returns for investors, but they are at different stages of development and have limited synergies.


It said becoming a pure play global components business will give the company strategic focus and enable it to accelerate growth.


Chief executive Paul Forman commented: “We have concluded it is in the best interests of all our stakeholders that Essentra becomes a pure play components business over time – reflecting the opportunity to build on its growth strategy and accelerate investment in organic and inorganic growth, leveraging its highly attractive financial model.”


The components division enjoyed a “very strong” third quarter with LFL revenue soaring 28.5% compared to Q3 2020, as supply chain challenges and cost inflation were mitigated by price increases, with further benefit expected in the final quarter of the year.


Integration of the recently completed acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co. Ltd is on track, Essentra said, adding that it continues to improve its digital platform for customers and the roll-out of its ERP [enterprise resource planning] system.


It predicted that the strong year-on-year growth in the components division will continue in the fourth quarter, albeit against tougher comparatives.


The strategic review of the filters business is expected to conclude in the second quarter of next year at the earliest.


“The filters division has made significant progress over the last four years on the delivery of all strategic ‘game changers’ and now has attractive long-term growth prospects,” Essentra said.


The filters business grew revenue by 2.8% in the third quarter against a tough comparative in 2020, and by 5% compared with the Q3 2019. Growth was driven mainly by higher volumes from outsourcing contracts, in line with expectations.


The division’s joint venture in China has made a positive start with volumes increasing each month. In Europe, trials were launched during the quarter into four markets using non-plastic biodegradable filters.


“We expect Q4 growth in filters to accelerate from the levels seen in Q3, driven by the China JV and further outsourcing wins,” Essentra said.


Meanwhile, the packaging business struggled in the third quarter as LFL revenue, down 6.1%, was impacted by delays in the recovery of elective surgeries and prescription levels


Looking ahead, Essentra said that while the packaging division has been hit by COVID-induced soft demand, rising material costs and labour shortages, the business should start to benefit from the recovery in global healthcare systems and pent-up demand for prescriptions and elective surgeries, with the recent order book showing early signs of improvement.


“I am pleased with the third quarter performance overall. Components has delivered strong revenue growth, filters has good momentum and packaging continues to manage the difficult conditions within its market. We continue to focus on organic growth and efficiency initiatives to drive profitability, as well as acquisition opportunities,” said Forman.


Essentra shares jumped 4.75% to 286.50p in midmorning trade.

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