Deutsche downgrades Essentra to 'hold', shares tumble

(Sharecast News) - Essentra tumbled on Monday after Deutsche Bank downgraded the shares to 'hold' from 'buy' and cut the price target to 100p from 150p as it said medium-term targets appear increasingly challenging.

"We think there is a meaningful risk that heightened input cost inflation, particularly in EMEA, will negatively impact demand through the remainder of FY26, once again deferring recovery prospects for the business," the bank said.

"Post the start of the Russia/Ukraine war, the volume shortfall more than offset any inflation-driven pricing benefit and drove negative LFL revenue growth from 4Q22 to 2Q24," DB noted. "At FY25 results management reiterated its medium-term targets, namely more than 10% constant FX revenue growth per annum (o/w more than 5% organic), circa 18% EBIT margin, 0-1.5x pre-IFRS 16 ND/EBITDA, and circa 18% net working capital/sales."

Deutsche said these targets, particularly the revenue and margin targets, will be increasingly challenging and likely to require a sustained period of buoyant demand, which contrasts with the demand volatility in the last decade.

"We think the leverage range combined with weak historical and FY26 prospective cash generation constrain the group's ability to grow through M&A," it said.

DB pointed out that Essentra last achieved an 18% EBIT margin in FY19, and said the margin profile has been declining since FY17.

"Our analysis of historical drop through margins informs our caution over future margin progression, which we think will require a meaningful organic acceleration that is not our base case," it said.

At 1355 BST, the shares were down 10.4% at 84.30p.

Essentra makes and distributes injection moulded plastic products, dip moulded vinyl parts and metal components.