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.
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.
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.
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.
