Tencel, touted as "the Lycra for the millennium", is unlikely to prove as lucrative as Courtaulds once hoped. First, the wonder-fibre is used in jeans - M&S is among the notable Tencel converts - and demand in the denim market is relatively weak. Second, Courtaulds, once the sole Tencel supplier, is now beginning to face competition. Nevertheless, prospects for Tencel are still good. Courtaulds reckons that Tencel will account for 20 per cent of all turnover within five years. Currently, it accounts for about 3 per cent of sales.
Even if Tencel fulfils all expectations, it is unlikely to be sufficient to transform Courtaulds into a high-growth organisation. The company needs to look elsewhere if it is to turn things around. Prospects at its coatings & sealants division, which account for about half of turnover, look good. Courtaulds has an entrenched position in market niches, such as aircraft coatings. Polymer products, which saw a moderate rise in profits this half, also look strong.
The real problem is that around one-fifth of revenues still come from viscose and acrylic. Not only are these mature markets, but competition, particularly in viscose, is vigorous. What is more, raw material prices for viscose and acrylic are notoriously volatile.
Forecasts from ABN Amro put Courtaulds on a forward p/e of about 12. The large discount to the market looks justified. Hold.