Order variability was referenced in H1 results, but latterly intake patterns have weakened. This has affected UK premium brands, following through into manufacturing activity also. We have reflected this in lower earnings estimates (c 10% for this year and next, with a smaller reduction for FY20) ahead of greater clarity on consumer behaviour in this segment. This news has been received harshly – judging by a sharp negative share price reaction – but feels overdone in our view.
An encouraging order intake period just before the H118 results announcement has proved to be a false read for the remainder of the year. A previously variable UK intake profile has weakened in the last few weeks across Walker Greenbank’s premium brand portfolio, although Clarke & Clarke is understood to be showing good y-o-y progress. Elsewhere in Brands, International and Licensing revenues are trading well and ahead of the prior year. Given that approaching half of the Manufacturing division’s gross revenue supports Brand activities, the weaker sales trend clearly has profit implications in a vertically integrated model.
Current year PBT guidance has been lowered by c 10%; we have reflected this in our estimates, with a slightly larger reduction for FY19 (-12%) and a more moderate one for FY20 (-6.5%). Our EBIT revisions are split between both divisions, being proportionately larger in Manufacturing but larger by value in Brands. Having increased our dividend growth expectations – particularly for future years – at the interim stage, we may revisit this at the full year stage, although we note that FY20 cover of 2.4x on revised estimates is still comfortable in conventional terms. Balance sheet gearing is expected to be modest at the end of FY18, with positive cash generation thereafter.
While the trading update was disappointing, we consider that a downward share price move of c 28% is disproportionate set against the scale of estimate revisions. Consequently, the current year P/E and EV/EBITDA have compressed to 10.4x and 6.7x respectively. Financial risk is very low and a prospective FY18 dividend yield of c 3% (3.2x covered) offers another indication of value.