James Cropper (CRPR) - boring packaging company hiding a hidden gem

Will this be the year that markets flip from glass half empty to glass half full?

Bought in Apr25 at 157p. A small size position (<5% of portfolio). Probably not going to add any more, unless liquidity and trade volumes improve. Otherwise would have gone to 5% of portfolio.

I have been monitoring James Cropper #CRPR $CRPR.L for a while now, since 2022 to be exact. Looking back at the Boon Fund archives, I did a write-up back in Jan24, where I said that the situation looked grim and there was a chance of covenant breaches. That was the right call, as the SP went from 400p+ to c150p now. CRPR have had to seek covenant waivers from their bank. Luckily, they have not been forced into a rights issue.

In a post in Dec24, I wrote that the situation still looked grim, albeit with a new CEO coming in (and a new CFO that joined Nov24), a clean set of management might be able to do a turnaround?

So overall, I’ve been gloomy on this share for a while, and rightly so - the fortunes haven’t turned around, and the SP has been on a continuous decline. This is the 5-yr chart of their share price:

So why have I decided to buy now? And what are the key risks? I lay it out below.

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A brief summary of what they do

James Cropper is a manufacturing company. They have two divisions: Paper and Advanced Materials.

In Paper, they produce packaging for retailers and luxury brands. Think the fancy high end boxes that cosmetics are shipped in when you buy online. Its not the standard cardboard or shipping boxes.

In Advanced Materials, they manufacture technical fibres, composites, and materials used in industrial, aerospace, defence, and energy sectors. One of the more promising sectors they sell to is hydrogen production, where their materials are used for PEM electrolysers.

So their business is very much B2B. They do their manufacturing in the UK for Paper, but for Advanced Materials they also have a manufacturing facility in the USA.

Over the past few years, the Paper division has been very challenged, as the eCommerce space has seen flat or negative growth after the COVID buying boom. This division is currently loss-making, and have undergone some restructuring in 2024 (but not enough, IMO).

In the Advanced Materials division, they had some good success in 2022, 2023 riding the optimism of Hydrogen as an energy source/storage, but as that industry has also struggled in 2024, so have revenues there. This division is highly profitable (20%+ operating margins).

In the latest HY to Sep24, Paper revenues were -12% YoY. Advanced Materials was -12% too. Ouch! Both divisions going backwards is never a good thing. However, they managed to roughly break-even on an operating profit and PBT level, not a bad outcome despite steep revenue drops.

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Why I have invested

» Advanced Materials on its own could be worth multiples of the current EV

This is the hidden gem in this group.

Despite the -12% revenue drop YoY in H1 to Sep24, they managed to have “margin growth” in H1. This suggests strong pricing power, and a product that has a serious competitive moat, despite challenging Demand conditions. Unfortunately, in the HY results they don’t give a division breakdown of the P&L, so we’re left guessing the quantum.

But the Advanced Materials division is highly profitable. In the FY to Mar24 results, it achieved a 27% adj EBITDA margin (£9.3m), and a 22.3% operating margin (£7.7m). Both are before central costs, but that’s not huge at only £600k.

If you value the division on a standalone basis at a bargain 6x EBITDA, even after taking out the central costs, that’s a £52.2m EV valuation. The EV of the whole CRPR group is currently £28m (£15m market cap, £13m net debt). The share price should be at least 2.6x where it is currently, even if you give zero valuation to Paper.

In the UK, the government is favourable towards Hydrogen as a clean energy technology, and is investing to boost the number of new projects. Recently, 27 new hydrogen projects have been selected for UK government funding and support. This is on top of 11 projects awarded £2bn back in Dec23.

In the future, we might have fields of hydrogen fuel tanks. PEM Electrolyzers are needed to convert electricity, from sources like Wind and Solar, into Hydrogen for energy storage. Image source: Microsoft Copilot

» Advanced Materials looks like it has bottomed-out, back to growth?

H1 to Sep24 revenues were £16.7m, which was down -12% YoY. However, it was up +8% H1-on-H2, so there are signs of stabilisation. The outlook statement given state “growth momentum to continue” and “order books have strengthened in the last few months”, so it would be surprising if we didn’t see further revenue growth progression in H2 vs H1.

Coupled with already strong profitability metrics (see above), I think investors will start thinking about James Croppers as more glass half full rather than half empty, when the FY Mar25 results are published. Especially if management assure that the AM division will continue growth for FY Mar26.

» Solid NTAV means bank pulling the rug is low

I make NTAV to be c330p per share, and the current share price is at 157p.

Inventories are OK at 2 months of revenues, Receivables also OK at less than 2 months. Current account position is healthy positive, so no immediate cash crunch.

However, I have not included the pension deficit, c£17m, in these calculations. Taking this into account, the NTAV is c150p, which is pretty much where the shares are trading at now. So still very healthily asset backed.

There is £6m of freehold on the balance sheet, compared to £13.1m of net debt (Sep24) so arguably they could do a sale and leaseback in the worse case scenario and reduce their net debt by almost half. The property could also be worth more, I haven’t checked if the £6m value is at cost, or recently updated valuation.

» USA manufacturing facility

Their Advanced Materials division has a manufacturing facility in the USA. Their main competitors in this space are USA-based as well as Europe-based. I haven’t been able to find any evidence of China-based competitors, but they probably do exist.

Needless to say, in these Trump Tariff times, having a manufacturing facility in the USA is now a huge benefit. Perhaps they will be announcing big growth in their order book soon…

» New management in, shows the family in control is happy to get outsider expertise

New CEO just started, new CFO started end of 2024. They also brought in a new MD for the Advanced Materials division last summer, from Victrex. So clearly, they are happy to have outsiders come in and shake things up.

» It has the potential to be a story stock

The dream of any value investing, of course, is not just a reversion to “Average” valuation, but where a company goes from unloved to being a story stock.

James Cropper has the potential to be that, with the Advanced Materials division. It sells into two sectors that could see frenzy over the next year or so - Defence and Hydrogen. It is currently trading at c0.15x Price/Sales ratio. Imagine if it became a story stock - easily to 0.5x, maybe 1x or more. That’s a huge possible multi-bagging.

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The Big Hairy Risks

» Covenant breach possibility

Their debt facility with HSBC has two covenants to be tested quarterly. It is the usual Net Debt to EBITDA, as well as EBITDA cover to net interest. There was a covenant holiday for the Jun24, Sep24, Dec24 quarters but back to normal as of Mar25, which I assume they have passed now given there has been no RNS announced.

I think as long as Paper losses do not increase, and they manage to stabilise them at the same levels of Sep24, then they are OK.

Advanced Materials should see a growth in revenues, and EBITDA in H2 to Mar25 and beyond.

And with these assumptions, I have calculated that they should be OK for the normal covenant levels going forwards.

Obviously, if macro-economic trends deteriorate, then covenants are a risk. One to keep an eye on.

» Pension deficit of £17m and continued contributions

Not a huge deficit, but its not small either. Sucking up £1.3m of contributions yearly from profits, and the yearly pension payments are only expected to peak in 2040, so its still got a long way to go.

This, I think, is probably the biggest obstacle to the company being able to sell off or spin off the Advanced Materials business, which will be the quickest way to realise value here.

» Closure of the Paper business might be unpalatable to the founding family

The founding family, as a concert party, still hold c38% of the total shares, so they have a blocking vote for any major decision. One of the family, Mark Cropper, is Chairman on the board. The business was built on Paper, and maybe the family will be stubborn in terms of legacy?

So we might get a case of them stubbornly trying to orchestrate a turnaround for a few more years to come, each year incurring heavy losses and distraction from the main investment case, Advanced Materials.

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The potential gains I see

Where do I see this going?

I see Paper getting back to EBITDA break-even within 12-18 months. Its not rocket science, trying to get a manufacturing business back to break-even.

I see Advanced Materials back into growth mode, and easily getting to £11m/yr EBITDA, if not more.

Strip out £600k of central costs, and then £4.6m of D&A, and £1.2m of debt interest costs, and its looking like £4.6m PBT and c36p EPS.

At an £11m EBITDA, the net debt of £13m is seen as manageable, just over 1x ratio.

And for a “growth” company in high tech products, with operating margins of 20%+, it really should be trading at least 10x PE, if not much higher. At this, we’re looking at a 360p share price, if not another +50%, +100% higher.

That’s more than double the current SP of 150-160p, so hence why I’ve bought in.