A narrower focus on core business strengths driven with greater operational intensity is an appealing proposition under a revised strategy and new senior management team. More detail will emerge here, but an intention to regain revenue momentum will be a clear marker to watch. H120 results were in line with pre-close comments and our earnings estimates are unchanged at this stage. They – and we suspect the company valuation – have yet to fully factor in renewed strategic impetus.
The new management team has outlined an updated corporate strategy which seeks to capitalise on the existing key group strengths. We summarise this approach as greater individual brand intensity and differentiation focused on core products (fabric, wallpaper and paint) supported by an enhanced supply chain and talent pool capability. The UK, US and a northern Europe bloc are the key revenue territories; all three areas already have some direct sales representation and all are tasked with growth. Explicit financial targets are still to be revealed externally, but this approach appears to us to be a logical and coherent way to create internally generated growth and business momentum without waiting for market conditions – in the UK in particular – to become more favourable.
H120 revenues grew modestly y-o-y, but both divisions delivered a more significant uplift in operating profitability with a better sales mix despite weak UK market conditions. Adjusted EPS rose by 17.1% in the first half but, without the significant H219 apparel licence income recurring, our unchanged earnings estimates – underpinned by some cost reduction actions – continue to anticipate a lower full year outturn y-o-y. Consequently, the H1 dividend was rebased referencing a stated commitment to a 30% payout ratio. The period-end balance sheet was in good shape with a small increase in net funds (to £0.9m).
From the half year period end to the results announcement, the company’s share price slid gently downwards; post results gains have now retraced such that it sits c 15% below its level at the start of the year. On our unchanged earnings estimates, the company’s P/E rating has settled for now below 10x sitting at 8.9x for the current year, declining to 8.1x by FY22. The equivalent EV/EBITDA multiples (adjusted for pensions cash) are 5.4x and 4.8x respectively. Other valuation metrics include a prospective FY20 dividend yield of 3.4% and a 21% discount to the reported endJuly NAV.