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Walker Greenbank WGB paper profits!


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Share price 142p

Market cap £101m

Shares in issue 70.9m

PE fc 9.4

 

Walker Greenbank make luxury wallpapers. It has a sublime range of brands in its portfolio including William Morris & Co (which, personally, I love!) as well as Sanderson, Clarke & Clarke and many others.

Wallpaper may sound a bit drab, however at home we were looking for a roll or two the other day and they can quite easily go for £100+ a roll!

 

Sales to January 2017 full year comprised £89.8m of which 61% is derived from domestic sales (£54.8m) and the remaining 39% or £35m is from international markets. These sales translated into profits of £10.2m in the same year, which seems reasonable, although not an astonishing return on £90m of revenue.

Back in 2017 the share price was well over £2 and hit a high of £2.40 around Q3 last year. The price subsequently plummeted to lows of £1.20 at the end of last year, a 50% drop in price, and the company halving in value.

wgb2.JPG

I am keen to look into what caused the drop in price and what we can learn from it, and what the outlook is, over the coming year.

Its worth noting that the shares are quite tightly held and a standard trade is to quote for 1,500 shares, therefore the price is quite sensitive to a) news events and b) and market activity (buys sells)

wgb.JPG

We know that Investec Wealth hold 9.2m of the shares, Octopus Investments also hold over 9m, Shrewd Schroders a cool 5.3m then a series of declared 3%+ holders including Rathbones, Brown Shipley Royal London (insurers) and Killik. The board then hold about 2.5m between them.

So there is not a lot of free float available, and when buying or selling occurs this moves the price. Hence the fall late last year, and hence today’s 7% rise on the back of buys.

 

The price was rocked in November 17’s trading update which gave mixed signals.

“In its interim results announcement on 4 October 2017, the Company stated that order intake was growing ahead of last year and on an improving trend in the run-up to the key autumn selling period. Since that announcement, momentum in order intake has not been sustained and Brand sales in the UK, excluding Clarke & Clarke, have weakened significantly against management's expectations.”

 

“The Board now expects that profits for the year ending 31 January 2018 are likely to be approximately 10 per cent lower than its expectations.”

 

Markets hate uncertainty, so selling surely ensued, with the price dropping from 210p down to 149p on that announcement.

To make matters worse, more panic set in early December when WGB announced a fire at one of the factory sites.

“Whilst the fire was minor, it is too early to know when the damaged printing machine will be back in production and if there is any potential impact on the Company's performance for the current financial year ending 31 January 2018.”

Again, uncertainty = sell off, and the price drifted to new lows. At 120p the company had a market cap of £85m, so was starting to look very interesting, at less than 1x Sales.

And for this, the company has cash on its balance sheet of £1.5m, stock of £30m and tangible assets of £15m. It has paid a dividend since 2010, increasing YoY, and even today yields 3.2% which is covered 3x by earnings. So it looks great as a recovery play, or for income. Add to that the company’s insurances will cover the fire damage (and probably any lost sales too) and we get an increasingly rosy picture.

 

Brokers were looking for sales of £109m in fy18, leaving £12.6m of PTP, or an EPS of 14.1p broker target prices are set at £2.22p or 67% higher than yesterday’s close of £1.32. WGB historically trades on an average 10year PE of 14, reflecting the high quality of the company and its unique brand portfolio. I think this too conservative, and its 3yr PE of 22x is probably more befitting this company.

 

If it makes forecasts or updates more positively then I think that confidence and rating will return, indeed only yesterday an RNS went out and was lost among the overall market panic. This Full year update guided us to Group sales ^ 17.9% to £108.9m in other words despite the fires are set backs it met the full year expectations. Once normality is resumed and proven, and with a fair wind it seems this years’ targets are attainable, being only 5% above last years, I think the bar is set low here. At FY 19 EPS of on a PE of 14 gives us £2.12 and a faith-restored PE of 22 gives us £3.32p

 

EDIT: I have just read that 'trading on 20 times forward consensus earnings, ... represents a discount to the luxury sector average of 25 times'

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There is not much happening here - but then why should there be, whilst the market waits for the ext news update.

 

As an aside, a publication to which I subscribe, wrote a piece on "Scandalous pay on AIM' and WGB features in this article. I will paraphrase some of the content below, noting the original author.

 

It is worth noting that the executive pay is not something I checked on this occasion. To lead the article and to give balance, I would also say this is a fairly tightly held family-controlled company, so in a way they are at complete liberty to structure in the following manner..

 

"reported statutory profit before tax of approx. £7m in 2017 but adjusted profit before tax of £10.4m. The adjusted number allows for the impact of a flood, but also covers acquisition related costs of £3m (the acquisition was sizeable at an initial £25m) and restructuring and re-organisation costs of a further £1.3m. On top of these to these charges shareholders had to bear the brunt of yet another generous award under the Group’s Long-Term Incentive Plan (‘LTIP’)....Aggregate directors’ remuneration over the 4 years from 2014 to 2017 sums to a stratospheric £10.8m (including LTIP awards), against an aggregate reported profit of £21.4m over the same period. Even when one adds back the pension adjustments, aggregate reported profit for the 4 years is only £24.3m. Over the same period shareholders have received dividends totalling approx. £6.5m. " [Chris Boxall, ShareSoc]

 

So there we have it, for balance it seems the company does pay high salaries and a large proportion of PTP to the directors.

I continue to hold.

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Today we got the full year results to 31 January 2018 (12months)

 

·      Sales up 17.7% to £108.8 million (2017: £92.4 million)  

·      Total statutory profit from operations up 78.6% to £14.0 million (2017: £7.9 million) due to a full year's earnings contribution from Clarke & Clarke

 

·      Adjusted underlying profit before tax* up 20.2% at £12.5 million (2017: £10.4 million)

 

·      Licensing income up 21.6% in constant currency at £3.1 million as a result of range extensions into new product categories

 

·      Underlying profit from operations** up 25.8% to £12.4 million (2017: £9.8 million)

 

·      Adjusted earnings per share* up 6.2% at 14.52p per share (2017: 13.67p per share)

 

·      Final dividend up 20.3% to 3.68p per share (2017: 3.06p per share), giving a total dividend up 21.1% at 4.37p per share (2017: 3.61p per share)

 

 

·      Direct business model launched in Moscow in February 2018, including a new showroom, with Germany to follow in H1 2018

 

I really like these figures, shows the aquisition was earnings enhancing and is filtering down to the group level. ALso these are not marginal 3-4% gains, we have sales and profits up circa 20%

 

However the market is selling off, and this is probably because the note ends with a cautious look-ahead statement:

 

In the first nine weeks of the current financial year, Brand sales were down 8.3 per cent in the UK and down 3.8 per cent overseas in constant currency, down 6.1 per cent in reportable currency. 

 

trading to date in the current financial year makes us cautious about the outlook; as a consequence, the Board expects that profits for the full year will be ahead of last year's but below current Board expectations. We will provide a further update on trading at our annual general meeting in June 2018."

 

This has put the shares down 5% at 8am, I watched with intent this morning as I think either direction is a result: if the market took it favorably I would be back in profit, but if a sharp sell off occurred I would, at discounted levels, be buying more.

 

Initially we had only sells, of around 26,000 shares, which is mostly small stakes selling out, perhaps tight stop losses being triggered on the fall of the bid, then a bit of buying which has strengthened the price. These shares are tightly held, with about 50m of the 70m free float in the hands of IIs. So even small buying and selling does amplify into the price.

 

It looks then as though the company are saying the year was good, but perhaps only expect marginal gains next year, and obviously, this depends on the wider macro picture which they cannot foretell.

 

Interestingly the licencing model seems to be very high margin, so could provide some stability if it continues to grow at 20%.

 

Continuing to hold, as a 3.6p final dividend is due, but didn't by any more * yet.

 

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Profit warning today (tonight) at 16:27pm - very bad form, imo.

You can run through previous RNS here https://www.investegate.co.uk/Index.aspx?searchtype=3&words=wgb

27 June the AGM statement cites: ""The out-turn for the full year remains in line with Board expectations and anticipates a further improvement in trading"

Less than a month later they state "Since the AGM, the Company has gained new information on the potential profit contribution from this large licensing agreement and, as a result, the Board has materially revised down its expectations for licensing income in the current year."

So we have a profit warning released 3 minutes before market close. Note share is also trading XD.

Not really sure where to go with this. It might be wise to look at revised broker targets. I will have to spend a bit of time now looking at my own forecasts. 

Company is now valued at £58m. Roughly twice its working capital. It is cheap, but the real question is can it recover. Is it a glitch..

 

 

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my early morning thoughts are: group is still profitable and has provided quite tight guidance on profitability. If I was no the button this morning I would have averaged down, but alas was not so missed the opportunity. I will continue to hold, as I think value will out here. I do not believe the market is in terminal decline at all. I do think the management are showing a real lack of credibility though, in announcing at the AGM all is fine, and a month later changing their stance completely. The yield should be safe, so in this occasion I have made an error of getting involved too early. I will continue to hold (it is a small-ish position) and see how the company pays out. I would not be surprised to see a bid at some point, because the directors are clearly lining their pockets and rewarding themselves as the company limps along right now. Fundamentally the business is a decent one, imo.

 

We all get some wrong! ?

 

cheers,

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