Yule Catto, which makes polymers for manufacturing rubber gloves and carpet backing, posted a 10% increase in full-year profit, to £34.5m, as cost cutting helped offset rising raw material prices and the weak US dollar. This was in line with a December trading statement.
The company said that it has made "a satisfactory start to 2008," with continuing momentum in its Polymers division, which provides 70% of revenues. It is "cautiously optimistic about the group's performance", although a "stable European economic performance is important for the 2008 full year outlook".
Yule Catto said raw materials prices will likely remain volatile, but it will continue to manage this via price increases and reformulations.
Net debt of £171m was broadly unchanged from last year, leaving the company highly geared with net debt and other liabilities exceeding three times EBITDA. Despite this, Yule Catto raised its dividend 3% to 9.6p a share.
"The dividend yield is the highest in the sector. That said, unless Yule Catto can reduce its net debt significantly, the long-term sustainability of this dividend level will remain under question," said Citigroup analysts.
Meanwhile, an increase in bond yields and pension top-up payments reduced the group's pension provisions on the balance sheet from £78m to £41m. According to Morgan Stanley, this reduction alone is worth 22p per share.
Shares in Yule Catto gained 21.5p to 161.5p, pricing the stock at 8.7 times the consensus EPS forecast of 18.4p for 2008.
Citigroup repeated a "hold" rating.
"Currencies, oil price inflation and lower GDP estimates are likely to put pressure on consensus estimates following these results, but nonetheless, the valuation of Yule Catto shares is now very low," analyst Andrew Benson wrote.
