Our companies analyst evaluates a firm preparing for a future when hydrogen is a significant energy source.
In the 1980s, James Cropper (LSE:CRPR), a centuries-old family owned Lakeland paper-maker went beyond paper, and the wood pulp it is made from, when it created a new business, Technical Fibre Products (TFP). TFP makes sheets from substances such as carbon fibre that improve the performance of composite materials.
Now, nearly four decades on, TFP has gone beyond fibre.
TFP’s technical fibre products have many characteristics: strength, fire resistance, insulation and electrical properties, for example. Perhaps the most famous destination for TFP products is sporting goods such as tennis rackets, but perhaps the most promising is as a substrate for the Gas Diffusion Layer in hydrogen fuel cells.
Hydrogen fuel cell technology may revolutionise transport by providing a clean source of energy and an alternative to batteries.
In addition to materials for fuel cells, TFP also supplies technical fibre products that improve the durability and functionality of wind turbine blades. Renewable energy such as wind is a prerequisite for using hydrogen as a store of energy because it is a source of green power for the electrolysers that convert water to hydrogen, which can be converted back into energy later by fuel cells.
When TFP took over PV3 Technologies in January, it acquired a third “entry point” into the hydrogen economy because PV3 (now TFP Hydrogen Products) supplies materials for water electrolysers as well as fuel cells. The acquisition represents a step beyond fibre because TFP Hydrogen Products supplies electrochemical materials like catalysts and coated electrodes.
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At the time of acquisition, PV3 was loss-making, but James Cropper is preparing for a future when hydrogen is a significant energy source. Twenty per cent of TFP’s revenue already comes from hydrogen products and, TFP says, 50% of the world’s hydrogen fuel cells incorporate its materials.
These days, TFP is James Cropper’s main source of profit, although the paper business is more than twice its size in terms of revenue and the number of employees who work for it. The paper division is also innovating, bringing its expertise to premium recycled, coloured, textured, and shaped paper and packaging.
Colourform, the third and much younger business in the group, specialises in bespoke moulded packaging for luxury brands. It has yet to make a profit, although it has grown revenue to £2.8 million from a standing start in 2016.
Past performance is not a guide to future performance. Source: James Cropper annual reports
Returns are no match for the story
Despite, or perhaps because costly innovation has yet to bear fruit, the results for the group are unexciting.
Return on sales average 8%, and return on capital 10% over the last 11 years. Average cash conversion is very weak due to investment and payments to plug the deficit in the company’s substantial and underfunded pension scheme.
The pandemic has not been kind to James Cropper either. A 25% reduction in revenue led to a 38% reduction in adjusted profit in the year to March 2021, excluding the cost of voluntary redundancies and legal costs relating to the acquisition of PV3, but including money received in state support during the pandemic.
The company generated lots of cash in comparison to the reduced profit because the company suspended substantial investment programmes and pension deficit reduction payments. Both drains on cash flow have now resumed.
In the paper division, revenue fell 32% and the business made a small operating loss. Colourform grew revenue 9%, but losses widened.
TFP is carrying the group. Its revenue fell 7% and adjusted profit fell 11%. Perhaps unsurprisingly sales into the aerospace market suffered most. Sales of fuel cell products continued to grow though, and unlike the other businesses, TFP still made a handsome return on sales of 26%.
Scoring James Cropper
Despite these figures, I like James Cropper. It has taken paper-making technology in surprisingly innovative directions. It says it makes materials with purpose, reducing the cost and increasing the efficiency of green energy, and sourcing fibre sustainably. The paper division has recycled 58 million coffee cups into packaging for luxury fashion brand Burberry (LSE:BRBY).
Although the investment required to get to this point is depressing profit, it might secure James Cropper a more profitable future.
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Meanwhile, the pandemic has accelerated the company’s transition away from commodity paper products as it reduces costs, focuses on more profitable paper niches such as recycled, coated and embossed paper, and increases capacity at its two growing businesses, TFP and Colourform. The increasing use of recycled paper is reducing James Cropper’s exposure to fluctuating pulp prices.
The company has restructured the three businesses, Paper, TFP and Colourform, so they are separate vertically integrated entities with their own strategies. As well as focusing them, it will save £2 million in annual running costs in the paper division.
Does the business make good money? 
? Modest return on capital
? Modest return on sales
˗ Weak cash conversion
What could stop it growing profitably? 
? Financial obligations (mostly leases and pension deficit)
? Competition (especially paper making)
? Sensitivity to pulp prices in paper making
How does its strategy address the risks? 
+ Innovation of niche products
+ Rationalisation of paper making
+ Vertical integration
Will we all benefit? 
+ Explains itself well
+ Celebrates achievements of staff
+ Experienced board is not overpaid
Is the share price low relative to profit? 
? A share price of £14.35 values the enterprise at about 22 times normalised profit.
With a score of 6 out of 9, James Cropper probably is a good long-term investment but it is shackled to a large pension scheme that drains resources. While TFP operates in many niches, the investment case also requires confidence in the development of a hydrogen economy that only exists in parts today.
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
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