Shares digital

Polymer and Straight struggle under the weight of poor performance and the demands of the City

by Dan Coatsworth

Market expectation of green companies is too high, causing share prices to be overly punished on the slightest bad news. At least this is the view of Gideon Feiner, chief executive of environmentally friendly packaging group Polymer Logistics – one of several businesses to have recently encountered difficulties and incurred the wrath of the City.

Green industries are certainly topical and attract widespread attention, but should such companies deserve a degree of leniency if they make mistakes, simply because the sector is perceived to be in its infancy? The market believes not, judging by the weak share price performance of many sector participants.

The business areas in which certain green stocks operate may be relatively new, such as biofuel feedstock, but most are established parts of industry. These stocks are simply seeing new drivers for growth or increased demand, which raises the question, is the reason why many green companies are struggling down to external issues out of their control or simply poor management?

Polymer Logistics saw 2007 pre-tax profit fall 7% to ?3.5 million. Negative factors included contractual disputes, higher raw material prices and a manufacturing partner going bust. A US Tesco supply deal may be slower to take off on reports that the supermarket’s Fresh & Easy brand expansion may not proceed quickly. Add in prior contract delays and the shares fell around 75% to 24.25p in the year to March. Only in recent days has the stock begun to recover, edging up to 34.25p.

‘The press, analysts and investors are nervous about the market and only look for short-term results. They take snapshots of a situation and don’t measure trends,’ says Feiner. ‘If you looked at Heathrow’s Terminal Five a fortnight ago, you would say British Airways are the most stupid people in the world. In a few weeks’ time, you will probably say they are a good business which has simply encountered a few teething problems.’

Feiner argues that Polymer’s business is growing and it now has the infrastructure to achieve this growth. However, he does admit that the business has been overambitious: ‘In hindsight, we did too much in 2007,’ he concedes. ‘We were naïve to believe everything would work 100 percent. That said, our US and Italian operations performed well and we have now strengthened the management team.’

Playing it straight

Straight, which supplies recycling bins to local councils and consumers, has also had a torrid 2007. Retail sales fell 44%, which it blamed on wet weather dampening garden product sales and high comparatives from an ‘exceptional’ year of sales in 2006. The company was also hit by higher overhead costs from fixed fees on a distribution contract. ‘The outsourcing model deployed has proved, with hindsight, to be a mistake and the distribution contract has been terminated,’ said the company.

Legislative drivers have been cited by many waste management businesses, including Straight, as being the catalyst for growth. Landfill taxes have slowly risen and councils are under pressure to recycle more household waste or face large fines – but they have been slow to react. As such, the knock-on effect to increasing sales for players such as Straight has been fairly negligible.

Defra has cut its funding to WRAP, the body promoting recycling, by nearly 30% this year. Straight works with WRAP to supply bins to consumers through local council promotions. Chief executive Jonathan Straight said the weaker funding had not ‘dampened activities to the extent we thought’. He said WRAP has doubled the selling price of compost bins to cover the funding shortfall.

Striking out

Both companies believe they have taken appropriate action to avoid a repeat performance of 2007. Straight has new products to become less seasonal. It is seeking overseas expansion and has sacrificed some margin to guarantee large volume sales. Polymer has restructured its management to gain better control of its rapid growth. It has taken more crate production in-house and taken precautions to protect the 30% of its business exposed to rising raw material costs. Polymer has only been on the market for 15 months, so it may get another chance to impress. Straight is already seeking another chance to perform, having pleaded with the City after struggling with costs in 2006. There is only so much room for forgiveness. Three strikes and it will be out.