An in line AGM update is to be welcomed after a tough trading year in FY19. Market conditions have yet to show any marked improvement, but UK cost savings and some international progress support our existing estimates. The new management team expects to deliver a strategy update in the Autumn and this should provide insight regarding future growth prospects. The rating has increased in recent months though FY20 should represent trough earnings in our view.
AGM comments indicate that trading patterns in the first four months of the year have been similar to those seen in FY19, in line with management expectations. Implicitly, UK Brands sales are still tracking below prior year levels though perhaps to a lesser degree, while a previously flagged US customer disruption for Clarke & Clarke had led to a small sales decline in the territory thus far. Other international markets overall are showing progress. The company’s manufacturing operations meet virtually all of the Brands division’s wallpaper and approaching half of its fabric requirements (apart from Clarke & Clarke) as well as selling to third parties, though no specific reference was made to performance here.
We are reminded that a strategy review led by the new CEO is in process, with management expecting to update the market in autumn this year, which may or may not coincide with the H120 results. An ungeared balance sheet provides headroom to selectively invest in the business while also being mindful of the need to restart earnings growth. Refined brand and geographic strategies and development of adjacent lines (eg licensing, finished goods, paint) are all potential areas that could help to reinvigorate revenue momentum in our view.
The share price recovery that started following the FY19 results has continued and it is now only c 6% below start year levels. With no change to our estimates since we last wrote, the company’s rating has rebuilt somewhat to a P/E of 9.5x and an EV/EBITDA (adjusted for pensions cash) of 6.0x for the current year, noting that we expect FY20 to be the trough from an earnings perspective. The previously noted discount to NAV has narrowed considerably to just 7% now on the last reported balance sheet.