A new CEO appointment follows other board changes; with tough UK conditions set to persist, operational improvements, international growth and brand development are all firmly on the agenda and a refreshed strategic update will come from the new team later in the year. With a broadly maintained payout ratio in FY19, lower earnings drove a similar reduction in dividends. With lower earnings anticipated in FY20, the company is trading on a prospective 3.8% dividend yield and a 7.8x P/E.
The headline FY19 revenue drivers were well trailed with the pre-close statement with normalised PBT (-25% y-o-y) and EPS (-27% y-o-y) in line with our revised estimates at that time. Higher licence and international revenues were bright spots but weak UK demand proved to be a significant headwind, most visibly affecting Brands’ profitability. Free cash flow improved significantly against the prior period and contributed to a modest net funds position at the end of the year. Our flat DPS expectation proved to be too optimistic; management elected to maintain the dividend payout ratio so lower earnings led to a full-year DPS reduction of 26%.
We expect to see similar market demand trends and a reversion to more normal core licence income levels driving a further step down in earnings and dividends in FY20. While our earnings estimates are effectively unchanged, we have now brought our projected dividend payout down to c 30% of earnings in line with the FY19 payout. Increased focus in developing individual brands and international markets has been highlighted previously by management. We expect board changes to result in further refinements to strategy, led by new CEO Lisa Montague, who brings experience in premium consumer brands backed by manufacturing operations. Three years on from the initial acquisition of Clarke & Clarke, and hence at the end of its earn-out period, its warehousing function is being consolidated into the group. We expect additional group operational actions and investment to follow subject to review by the refreshed management team.
Some recovery from the recent 56.5p low means that the share price is now down c 25% ytd triggered by the February/year-end update. The discount to NAV now stands at c 25%, while the current year P/E and EV/EBITDA (adjusted for pensions cash) are now just 7.8x and 4.9x, respectively. On our reduced dividend expectation, Walker Greenbank is still offering a 3.8% prospective yield.