Straight’s strategy will be vindicated says boss

Leeds-based Straight plc took the bulk of its production in-house in 2010, in a strategy known as vertical integration, buying Hull-based injection moulding firm Powell Plastics for £2.9m.

But it recently issued a profits warning after surging plastics prices made a big wheelie bin contract unprofitable.

Mr Straight, who founded the company in 1993, said the market is taking an overly pessimistic view of the AIM-listed company. Its shares hit 118p in February but closed at 74p on Friday. That values the £28.5m turnover company at just £8.8m.

Mr Straight said he stands by a target of growing the company’s market capitalisation to £100m.

“Given what’s happened in the wider market over the last year its really only the strategy of vertical integration that’s allowed us to maintain our margins,” he said. “Had we not vertically integrated I think we would be in quite a poor place.

“There’s a real feel-good factor about being part of the British manufacturing industry and being able to contribute to local employment and local prosperity, rather than doing what everybody else seems to do and bring stuff from China.

“The vast majority of what we sell, probably three- quarters, comes out of that factory. We got to a point where the benefit of doing it yourself far outweighs the downside.”

Straight has already told the market to expect a £0.1m pre-tax loss for the first six months of the year. Revenues increased by 14 per cent in the first half to about £15m from £13.2m a year earlier but were below expectations.

However, it expects a return to profitability in the second half, as it cuts costs and streamlines manufacturing.

The troublesome £1.5m wheelie bin contract finished in early July, but Mr Straight said the group was hamstrung while fulfilling it.

He said: “When you’re in a contract like that, which takes up the machines for a long time, if it’s losing money you’re not able to generate any money.”

He added the group may have some “comeback” on the contract, which had also been delayed.

Polyethylene, its raw material for wheeled bins, had surged to about £1,300 a tonne by May from below £1,000 a tonne in September 2010. Due to their weight, plastic makes up most of the cost of a wheeled bin, meaning a raw materials increase can wipe out any profit.

Polypropylene, another key raw material for the company, cost about £1,150 per tonne in September 2010, but had increased to £1,385 per tonne by May.

“It has never really been our issue,” said Mr Straight. “It was always managed by someone else until we had the factory.

“What would have happened this time is the supplier would have gone bust.”

Straight’s manufacturing strategy started in March 2010 when it bought the bulk of waste company Helesi’s UK business for £1.65m in cash, after the firm ceased manufacturing at its Bradford plant in September 2009.

Last August it bought Powell, which earned the bulk of its £10m annual revenues making plastic recycling and waste containers for Straight.

Since then, Straight has continued to increase its production capability. Earlier this year it installed blow moulding production lines in Hull when its water butt supplier went bust. It has also added warehousing and storage space and now employs about 110 staff at the Hull factory.

“It’s required a major expansion of the factory. We’ve pretty much doubled the space by installing a temporary building.”

The company, chaired by James Newman, the former Master Cutler and chairman of Finance Yorkshire, has also significantly increased the proportion of recycled plastic in its products.

Mr Straight said total investment in vertical integration has cost Straight £6m to £7m.

The entrepreneur, who holds 38 per cent of the company’s equity, said the company’s target of achieving a £100m market value by 2014 has been pushed to 2015, but is still feasible.

“I’m continuing to devote considerable time to looking at opportunities despite the fact that perhaps we can’t pay for businesses tomorrow,” he said.

“If you look where we’ve come from 12 months ago, we’ve come an awful long way in a recession.

“We’ve not made any money in the last six months but that masks what’s going on underneath.

“It’s accepted from the highest echelons that there’s a short-termism in the market.”