Small-cap Focus: UK Chemicals Have Export Opportunities

In its heyday as one of the world’s largest manufacturers, Imperial Chemicals Industries pumped out substances that went into everything from polymers to paints, employing thousands of people at vast works around the country.

Like many of Britain’s heavy industries, however, the production of commodity chemicals on a large scale went into decline as lower-cost competitors emerged in Asia.

And yet not only does a domestic sector remain, but it continues to be one of the country’s biggest foreign currency earners through exports. Today, many UK chemicals producers concentrate on speciality formulations, made in small batches and selling at high values.

They include several small-cap stocks, listed on London’s junior market, that supply chemical products for a variety of niche applications, ranging from insoles for sports shoes to flavourings for food and drinks.

Treatt

Founded in 1868, Treatt makes fragrances and flavours for consumer goods industries, with a particular strength in citrus. The company is riding the backlash against sugar added to food and drinks, as manufacturers look for healthier replacements.

Booming demand for its sugar reduction products, alongside flavour ingredients for teas, has led to earnings upgrades and fuelled a rally in the stock over the past year.

Pre-tax profit jumped by more than half to £8.3m in the six months to March 31, on revenue that was up 27 per cent to £51.8m.

As an exporter, Treatt has also benefited from sterling’s devaluation following last year’s EU referendum, which boosts its sales once translated into pounds.

The company is investing to increase its production capacity, including in a new brewing centre allowing customers to recreate specific beer types and flavours. In addition to the UK, it has operations in the US, China and Kenya.

Yet because of its strong reputation, some analysts see the Bury St Edmunds-based business as a potential takeover target by a bigger company.

Shares in the company have almost doubled this year to 501p, giving it a market capitalisation of £260m.

Zotefoams

Although far from a household name, Croydon-based Zotefoams supplies the material used for insoles for sports shoes made by big brands such as Puma.

A specialist manufacturer of block foam, the company’s traditional product line is made by expanding a polymer with nitrogen gas. It is used in a wide range of sectors including automotive, aviation, packaging, construction and marine.

However, its two other areas of activity seem to have higher growth potential. One is high-performance foam products, for uses such as insulation in medical clean rooms.

The second is a business that licences a manufacturing technology that injects gas bubbles into packaging as it is being extruded, to reduce the amount of material used. An early customer is Dove, which uses the technology when making body wash containers, though sales constitute a small proportion of total revenue.

James Tetley, analyst at N+1 Singer, says the technology has “huge potential” and could eventually become as important for group earnings as Zotefoams’ main division.

Investors appear to agree. The stock has gained 24 per cent this year to 309.8p, giving the company a market value of £137.6m.

Despite a fall in volume from its staple foam product, favourable currency rates helped Zotefoams deliver a 7 per cent increase in revenue to £57.4m last year. Meanwhile pre-tax profit rose 16.3 per cent to £7m.

Hardide

Shareholders in Hardide recently had cause for cheer when the company gained approved supplier status from Airbus, the European aerospace giant, for the coating of flying components.

Significant orders could help the small-cap diversify from its mainstay of oil and gas. Hardide produces coatings for metal components used in demanding applications.

The crude downturn has weighed on the Oxfordshire-based company, which has a high exposure to exploration drilling. Full-year revenue plunged by almost 30 per cent to £2.14m in the year to 30 September, while pre-tax losses deepened to £1.46m.

However, signs of improvement exist. Sales to the oil and gas sector more than doubled in the first six months of its financial year.

The company’s share price has also recovered from 0.72p to 1.85p throughout 2017, though it is still some way off the level of 2.35p just before the crude price slump began three years ago.