The proposed acquisition of Clarke & Clarke (the first deal for more than 10 years) represents a big leap forward for the group, increasing our group 2018 PBT estimate by 45%. Moreover, the group’s fabric printing business is back in full production following the major flash flood last December. Despite the challenging trading climate, Walker Greenbank expresses its confident outlook with a 25% increase in the interim dividend.
Key strategic acquisition
Walker Greenbank has announced the proposed acquisition of Clarke & Clarke for an initial consideration of £25m cash; further payments totalling up to £17.5m, payable in equity, are based on its trading performance over the next four years. The businesses are complementary and broaden the product spread, while we see considerable medium-term benefits stemming from cross-selling and using the group’s manufacturing skills to help broaden the product range. Management indicates that the acquisition will be materially earnings enhancing in its first full year within the group.
Trading back on course
Interim results show underlying pre-tax profit up by 2.7% to £3.78m, consolidating £1.6m loss of profit insurance payments. Further payments, especially related to the loss of profit in the group brands and the likely impact of the flood over the next two years have still to be agreed. More significantly, the factory is now operating at full capacity and we feel able to restore our earlier profit estimates. Trading conditions remain challenging, especially in the context of uncertainties following the Brexit vote, but the group’s consistent long-term investment policy enables us to look ahead with cautious optimism.
Finances remain strong
Net funds increased by £0.2m over the half year to £2.5m. With a £17m (gross) equity fund-raising to help finance the £25m cash element of the acquisition, the group will move into debt during the second half. Our current January 2017 net debt estimate of £5.5m is well within group facilities.
Valuation: The catalysts for the share price
Walker Greenbank’s share price has been consolidating over the past three years. Clarification of the impact of the flood and the earnings-enhancing acquisition could be catalysts for the share price to start moving ahead. The prospective P/E rating relative to its peer group for CY16e (16.3x vs 18.0x) and CY17e (13.2x vs 17.1x) makes the shares attractive.