We consider the share price reaction (-7%) to the likely flood impact to be overdone. Losses are fully insured, with estimate reductions indicated to be recoverable when the claim is settled. With a negligible anticipated long-term impact, the weakness represents a buying opportunity.
Severe flooding has caused considerable damage and halted production at the group’s fabric printing factory. On present indications, digital printing will begin early in 2016, with a progressive restoration leading towards full production by April. The factory is responsible for the entire group requirement for printed fabrics and also supplies more than half its revenue to third-party customers, including many of the group brands’ leading competitors. At the interim stage of the current year, its revenues were up by 18% to £9.6m, with a substantial, but unspecified, increase in profit. The second half will have started well, with production running at peak levels over the September/November period to meet autumn and Christmas demand.
Management indicates that flood damage and business disruption costs are fully covered by insurance; however, current year pre-tax profits are now indicated to be 15% below market estimates. The year to January 2017 will also be affected – we have tentatively adjusted our estimate by £1.9m. We understand that the shortfalls should be reimbursed (presumably as an exceptional item) when the insurance claim has been agreed. Post 2017, the long-term impact should not be material. Near term, the 2015 key selling period is been largely complete, reducing the impact of customer disappointment, while the lack of suitable UK competition will make it more difficult for third-party customers to re-source their product.
The group balance sheet is well-equipped to withstand the impact. At January 2016, inventories may be lower than originally planned, but cash flow will also be lower and the group will almost certainly incur costs, which will not be recoverable until the following year. We now look for modest net funds at January 2016.
With the exception of Burberry (cautious trading statement) members of Walker Greenbank's peer group have edged higher since our outlook report in October. A modest premium on the basis of calendar 2016 earnings (16.2-15.8x) reflects a balance between the strong medium-term outlook and the immediate difficulties.