Walker Greenbank — Earnings pressure but asset backing

Walker Greenbank — Earnings pressure but asset backing

Management recently flagged licence and UK order book development below levels anticipated at the AGM and lowered FY19 PBT guidance to the £9.5–10m range. The share price is now at its lowest level for over five years and – trading below NAV – implicitly attributes no value to the brand portfolio. A dividend yield in excess of 5% could also be an attraction.

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Written by

Walker Greenbank

Earnings pressure but asset backing

H118 update

Care & household goods

3 August 2018

Price

77.5p

Market cap

£55m

Net debt (£m) at end January 2018

5.3

Shares in issue

70.9m

Free float

92%

Code

WGB

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(28.6)

(27.9)

(67.2)

Rel (local)

(28.8)

(28.2)

(68.0)

52-week high/low

241.5p

77.5p

Business description

Walker Greenbank is a luxury interior furnishings group combining specialist design skills with high-quality upstream UK manufacturing facilities. Leading brands include Harlequin, Sanderson, Morris & Co, Scion, Anthology, Zoffany and Clarke & Clarke. FY18 revenue: UK 58%, International 39% and Licence income 3%.

Next events

FY18 final DPS to be paid

10 August 2018

H119 results

October – date tbc

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Walker Greenbank is a research client of Edison Investment Research Limited

Management recently flagged licence and UK order book development below levels anticipated at the AGM and lowered FY19 PBT guidance to the £9.5–10m range. The share price is now at its lowest level for over five years and – trading below NAV – implicitly attributes no value to the brand portfolio. A dividend yield in excess of 5% could also be an attraction.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/17

92.4

10.4

12.9

3.6

6.0

4.7

01/18

108.8

12.5

14.4

4.4

5.4

5.6

01/19e

106.0

9.5

10.8

4.4

7.2

5.6

01/20e

107.9

9.6

10.9

4.4

7.1

5.6

Note: *PBT and EPS (fully diluted) are normalised, excluding exceptional items and LTIP charges.

Recent trading newsflow disappoints

Disappointing sales development in the last month prompted a weak trading update (24 July). Licence income has grown in recent years (to £3.1m in FY18) and the largest single agreement to date was signed in H1, all to be booked in FY19. However, earlier expectations were for it to have been higher value; any shortfall in this revenue stream has a disproportionate impact on profit. Secondly, UK Brand order intake has disappointed in recent weeks (H119 revenue -6.8% overall). John Lewis Partnership’s weekly sales development corroborates this; year-to-date Home category sales development has gone from -2.7% (and stable) just before Walker Greenbank’s AGM to -4.0% four trading weeks later, with more variable negative weekly figures. More positively, US Brand sales (+4.9% l-f-l), Licensing (+40.4%) and third-party Manufacturing (+11.1%) have all shown good y-o-y progress ytd.

Estimate revisions focused on the UK

Retailers generally have pointed to better outdoor category sales in the UK and it remains to be seen whether the consumer has been distracted temporarily (by the hot weather / World Cup / Brexit newsflow) or whether the current activity levels are to be sustained. Taking management’s FY19 PBT guidance, we have lowered our current year estimate by 26%, substantially driven by Brands. Moreover, we now assume no UK Brand growth from a reduced FY19 base level in FY20 and FY21, and this feeds through to similar PBT reductions in these two years also, pending more positive consumer confidence readings.

Valuation: Low rating in context

The company’s share price gapped down following the 24 July update and is at levels last seen in early 2013 during the post-recession recovery phase. Increased confidence in the earnings outlook would naturally result in some expansion of valuation multiples from current levels (FY19 P/E 7.2x, EV/EBITDA, adjusted for pensions cash 4.6x), in our view. In the light of our estimate revisions, we have elected to factor in a flat DPS profile (previously a 5.5% CAGR); on this basis earnings cover remains comfortably above 2x and the balance sheet to us seems strong. Indeed, the share price now sits below our projected 90p end-FY19 NAV.

Exhibit 1: Financial summary

£m

2013

2014

2015

2016

2017

2018

2019e

2020e

2021e

January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

75.7

78.4

83.4

87.8

92.4

108.8

106.0

107.9

111.0

Cost of Sales

 

 

(30.2)

(30.3)

(32.7)

(35.9)

(36.2)

(43.3)

(41.8)

(42.5)

(43.7)

Gross Profit

 

 

45.5

48.1

50.7

52.0

56.2

65.5

64.2

65.4

67.3

EBITDA

 

 

8.6

9.7

10.7

11.8

13.4

15.9

13.0

13.3

14.1

Operating Profit (before GW, except. & LTIP)

6.6

7.5

8.3

9.1

10.6

12.8

9.9

10.0

10.7

Operating Profit (before GW and except.) - reported

5.8

6.5

7.3

8.2

9.8

12.4

9.3

9.4

10.1

Net Interest

 

 

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.3)

(0.4)

(0.3)

(0.3)

Intangible Amortisation - acquired

 

 

0

0

0

0

(0.3)

(1.0)

(1.0)

(1.0)

(1.0)

Pension net finance charge

(0.7)

(0.9)

(0.8)

(0.7)

(0.5)

(0.6)

(0.6)

(0.6)

(0.6)

Exceptionals

 

 

0

0

0

0

(1.8)

2.3

0.0

0.0

0.0

Other

 

 

0

0

0

0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

6.4

7.3

8.1

8.9

10.4

12.5

9.5

9.6

10.4

Profit Before Tax (FRS 3)

 

 

4.9

5.5

6.3

7.3

7.0

12.8

7.3

7.4

8.2

Tax

 

 

(1.0)

(0.5)

(1.2)

(1.5)

(1.6)

(1.0)

(1.9)

(1.9)

(2.1)

Profit After Tax (norm)

 

 

5.4

6.6

6.9

7.5

8.6

11.5

7.6

7.7

8.3

Profit After Tax (FRS 3)

 

 

4.0

5.0

5.1

5.9

5.4

11.8

5.4

5.5

6.1

 

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

57.5

58.5

59.3

60.0

62.7

70.4

70.7

70.7

70.7

EPS - normalised (p) FD

 

 

9.4

10.7

11.2

11.6

12.9

14.4

10.8

10.9

11.8

EPS - FRS 3 (p)

 

 

6.9

8.6

8.6

9.8

8.6

16.7

7.7

7.8

8.7

Dividend per share (p)

 

 

1.5

1.9

2.3

2.9

3.6

4.4

4.4

4.4

4.4

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

60.1

61.3

60.8

59.2

60.8

60.2

60.6

60.6

60.6

EBITDA Margin (%)

 

 

11.4

12.4

12.8

13.4

14.6

14.6

12.3

12.3

12.7

Operating Margin (before GW and except.) (%)

7.7

8.3

8.8

9.3

10.7

11.4

8.7

8.7

9.1

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

18.5

21.1

21.5

18.9

47.5

47.7

47.6

46.8

45.9

Intangible Assets

 

 

6.7

7.3

7.2

7.1

31.6

31.8

30.6

29.5

28.4

Tangible Assets

 

 

9.8

11.7

12.7

11.7

15.8

16.0

16.9

17.3

17.5

Investments

 

 

2.0

2.2

1.6

0.1

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

32.6

35.3

37.1

40.3

51.3

51.9

53.1

54.8

57.4

Stocks

 

 

16.8

18.4

22.0

18.1

30.3

29.4

30.4

30.9

31.8

Debtors

 

 

12.8

13.9

14.1

19.3

19.5

21.2

21.4

21.6

22.1

Cash

 

 

2.9

2.8

1.0

2.9

1.5

1.3

1.3

2.3

3.5

Other

 

 

0.1

0.2

0.0

0.0

 

 

 

 

 

Current Liabilities

 

 

(17.3)

(19.4)

(20.7)

(19.4)

(34.8)

(28.9)

(29.6)

(30.2)

(31.1)

Creditors

 

 

(16.9)

(19.0)

(20.3)

(19.0)

(28.0)

(22.4)

(23.0)

(23.6)

(24.5)

Short term borrowings

 

 

(0.4)

(0.4)

(0.4)

(0.4)

(6.8)

(6.6)

(6.6)

(6.6)

(6.6)

Long Term Liabilities

 

 

(9.6)

(10.2)

(10.9)

(4.5)

(12.7)

(9.1)

(7.1)

(5.0)

(2.8)

Long term borrowings

 

 

(1.4)

(0.9)

(0.6)

(0.2)

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

 

 

(8.2)

(9.2)

(10.4)

(4.3)

(12.7)

(9.1)

(7.1)

(5.0)

(2.8)

Net Assets

 

 

24.2

26.9

26.9

35.3

51.3

61.6

63.9

66.3

69.4

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

6.0

6.2

3.5

7.1

12.4

7.0

9.3

9.8

10.2

Net Interest

 

 

(0.2)

(0.2)

(0.2)

(0.1)

(0.2)

(0.2)

(0.3)

(0.3)

(0.3)

Tax

 

 

(0.0)

(0.0)

(0.0)

(0.6)

(2.3)

(2.2)

(1.9)

(1.9)

(2.1)

Capex

 

 

(3.1)

(4.7)

(3.2)

(2.5)

(6.7)

(3.5)

(4.0)

(3.5)

(3.5)

Acquisitions/disposals

 

 

0.0

0.0

0.0

0.0

(27.1)

0.0

0.0

0.0

0.0

Financing

 

 

(0.1)

(0.0)

(0.4)

(0.1)

18.3

1.8

0.0

0.0

0.0

Dividends

 

 

(0.7)

(0.9)

(1.1)

(1.4)

(1.8)

(2.7)

(3.1)

(3.1)

(3.1)

Net Cash Flow

 

 

1.8

0.3

(1.5)

2.3

(7.4)

0.1

(0.0)

1.0

1.2

Opening net debt/(cash)

 

 

0.7

(1.2)

(1.5)

(0.0)

(2.3)

5.3

5.3

5.3

4.3

HP finance leases initiated

 

 

0.0

0.0

0.0

0.0

(0.0)

0.0

0.0

0.0

0.0

Other

 

 

0.0

0.0

0.0

0.0

(0.2)

(0.1)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(1.2)

(1.5)

(0.0)

(2.3)

5.3

5.3

5.3

4.3

3.1

Source: Company, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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