Branding strength, manufacturing restored

Walker Greenbank 10 May 2017 Update
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Walker Greenbank

Branding strength, manufacturing restored

FY17 results

Care & household goods

10 May 2017

Price

214.5p

Market cap

£149m

Net debt (£m) at end January 2017

5.3

Shares in issue

69.6m

Free float

92%

Code

WGB

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

6.5

9.7

Rel (local)

(0.5)

3.9

(8.5)

52-week high/low

222.5p

159.5p

Business description

Walker Greenbank is a luxury interior furnishings group combining specialist design skills with high-quality upstream manufacturing facilities. Leading brands include Harlequin, Sanderson, Morris & Co, Scion, Anthology, Zoffany and Clarke & Clarke.

Next events

AGM

21 June

Ex-dividend: FY17 final DPS 3.06p

21 July

FY17 final DPS paid

11 August

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Walker Greenbank is a research client of Edison Investment Research Limited

FY17 was a testing year but management emerges with credit, having restored and improved flood affected fabric printing operations and added another mid-market brand (Clarke & Clarke) to the portfolio. International exposure, acquisition effects and the absence of flood distractions mean that Walker Greenbank is well positioned for good earnings growth. We would expect this momentum to translate to share price performance.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/16

87.8

8.9

11.6

2.9

18.5

1.4

01/17

92.4

10.4

12.9

3.6

16.6

1.7

01/18e

114.7

14.3

16.1

4.4

13.3

2.1

01/19e

119.7

15.2

17.0

5.1

12.6

2.4

Note: *PBT and EPS (fully diluted) are normalised, excluding exceptional items and LTIP charges.

Good gains despite flood impact

Reported revenue and operating profit increased by 5.2% and 20%, respectively, in FY17. Recovery from the December 2015 flood (at Standfast & Barracks’ fabric printing facility) affected operational performance though insurance cover protected profitability despite a revenue shortfall against budget. A maiden four-month contribution from Clarke & Clarke provided a further boost to Brands and group profitability. Overall, underlying PBT and fully diluted EPS rose by 16.9% and 11.3%, respectively, and full-year DPS was increased by almost 25%. The company moved into a modest net debt position (of £5.3m or 0.4x EBITDA) due to the net cash impact of acquiring Clarke & Clarke.

Well positioned for progress

Management actions – through insurance and operational recovery – mitigated the impact on group financial performance and the team deserves credit for this outturn. Further development of overseas presence, some organisational change – including senior management hires – and the acquisition of Clarke & Clarke during the same 12-month period were other notable achievements. This leaves Walker Greenbank well positioned on all fronts to make progress in FY18 in our view and the company retains the financial flexibility to further develop the business through both organic and acquisitive investment.

Valuation: Growing earnings and dividends

Excluding the general market sell-off immediately following the Brexit outcome last June, Walker Greenbank’s share price has largely traded in the 200-220p range over the past 18 months, modestly outperforming the FTSE All Share Index in the year to date. Strong profit growth is expected in FY18 and the current year P/E and EV/EBITDA are 13.3x and 8.7x, respectively; our three-year (2017-20) EPS CAGR is almost 12%. The trailing dividend yield is relatively low at 1.7% but, with a comparable period expected DPS CAGR of c 17%, shareholders look set to receive good income growth also.

FY17 results overview

Normalised PBT up 16.9%, fully diluted EPS up 11.3% and DPS up 24.9% were the headline financial highlights for FY17 and Walker Greenbank ended the year with modest gearing. There are complexities to understanding Walker Greenbank’s FY17 financial outturn owing to flood/insurance profit and cash implications as well as favourable FX translation effects and a part year contribution from Clarke & Clarke (acquired October 2016). We contend that the underlying group performance was robust in the circumstances, most readily seen in a 160bp gross margin improvement to 60.8%. Clarke & Clarke brings further brand presence and sub-sector focus to the Brands portfolio.

Exhibit 1: Walker Greenbank divisional and interim splits

Year end 31 January, £m

H1

H2

2016

H1

H2

2017

% chg

% chg

Reported

Reported

H117

FY17

Group revenue

45.8

42.0

87.8

41.8

50.5

92.4

-8.7%

5.2%

Brands

34.5

33.4

67.9

33.8

42.8

76.6

-2.0%

12.8%

Manufacturing

18.6

15.7

34.3

15.0

17.1

32.0

-19.8%

-6.7%

Inter company

-7.4

-7.0

-14.4

-7.0

-9.3

-16.3

Group operating profit (reported)

3.4

4.8

8.2

3.6

6.3

9.8

4.8%

20.0%

Brands

3.3

4.7

8.1

3.6

5.6

9.2

8.1%

14.3%

Manufacturing

1.8

0.7

2.5

0.2

0.9

1.0

-90.4%

-58.7%

Central items*

-1.8

-0.6

-2.4

-0.2

-0.2

-0.4

Source: Edison Investment Research, Walker Greenbank data. Note: * Loss of profits figures of £1.4m and £2.8m included in central items in H117 and FY17, respectively.

Brands (FY17: 71% of group gross revenue, 90% of reported EBIT, pre-central items)

Internationally recognised heritage and contemporary, premium and mid-market, wall covering and furnishing brands (Sanderson, Morris & Co, Harlequin, Zoffany, Scion, Anthology, Clarke & Clarke).

This division saw some trading impact from the Lancaster flood (see below) in UK and US revenues (55% and 13% of FY17 divisional total, respectively), though Western Europe and licensing income were both ahead like-for-like. Favourable currency translation plus a maiden four-month Clarke & Clarke contribution resulted in an improvement in both revenue and EBIT reported for the year. The Arthur Sanderson, Morris & Co and Zoffany brands performed comparatively well in underlying terms, while Harlequin supply was more affected by the flood. Clarke & Clarke – positioned in the accessible mid but not mass-market sub-sector – made a good initial contribution (c £7.3m revenue and £1.0m PBT) including top-line growth of 6.8% against the comparable pre-acquisition period.

Manufacturing (FY17: 29% of gross revenue, 10% of EBIT)

Two locations, Anstey (wallcoverings) and Standfast & Barracks (fabrics), that produce high-end furnishings with output split broadly equally between the group Brands division and third parties.

A flood at Lancaster (in December 2015, causing a 16-week stoppage in fabric printing) and subsequent recovery during H117 was a focal point during FY17. Three digital printing lines were replaced including upgrades with increased capability and faster run rates, and new flood defences were also added. Insurance substantially covered the capital rebuild and also loss of profits. Note that this included existing lines, some new work (won but unable to deliver, including re-prints) and, owing to the integrated business model, an element of lost Brands profit also. The total recovered loss of profits contribution to date is £4.2m (£1.4m in FY16, £2.8m in FY17, all reported under the central items line). Given a higher level of new product launches, group brand sales did comparatively better than third-party sales from both Anstey and Standfast & Barracks. To some extent, third-party relationships may have to be restored, but we feel that the group’s manufacturing operations will not have been disadvantaged in the medium to longer term. After an inevitable rebuild, inventory levels were back to normal levels by the end of FY17.

Good underlying cash flow credentials

The company ended FY17 with net debt of £5.3m compared to a £2.3m net cash position a year earlier. This movement was substantially the product of c £5.3m organic cash inflow (ie £7.1m free cash flow less £1.8m cash dividends) and a £12.6m net acquisition outflow (ie £28.6m Clarke & Clarke cash consideration plus transaction costs, part funded by £16m new equity proceeds).

The group organic cash performance was obviously affected by flood disruption and recovery. We separate these effects and other non-trading cash movements, as follows:

Flood cash impact: we estimate that the overall flood-related net cash inflow was in the order of £3m for the full year. This comprised £15.4m gross insurance proceeds (split c £13.2m in trading cash flow, c £2.3m in investing activities) less rectification costs incurred and full capex replacement/upgrade spending. Due to timing effects, the net inflow was probably near to £5m in H1, with a c £2m outflow in H2.

Pensions: the balance sheet gross pension deficit stood at £7.4m at the end of FY17. Following the January 2016 triennial valuation, an unchanged deficit recovery cash payment was agreed and paid in FY17 (ie £1.8m in year one, rising at 5% pa).

LTIP: combined tax and NI payments relating to vested LTIP shares in the year were c £0.7m.

On a net basis, these items are broadly equivalent and adjusting for them suggests that underlying free cash flow for existing businesses in FY17 was c £5m.

Outlook: brands growth, manufacturing recovery and acquisition effects should support rising profitability over our forecast horizon, though some growth working capital absorption is likely to temper the benefit at the trading cash flow level. Compared to our illustrative £5m underlying free cash flow above, we estimate that FY18 will be c £2-3m higher with further progress in the two subsequent years. We do expect ongoing pension deficit recovery and LTIP cash outflows, but assume that the tail of flood-related cash flow movements will be neutral in FY18. Taking these factors into account, we expect that Walker Greenbank will be modestly geared at the end of FY18 and, in the absence of further acquisitions, should move into a net cash position in FY19.

Positive start to FY18

FY18 has started positively for Walker Greenbank; Brands revenue (excluding Clarke & Clarke) was up 4.4% reportable and up 0.9% in constant currency terms in the first 12 weeks of the year, driven, we understand, by overseas operations. Clarke & Clarke’s additional eight months’ contribution in the year, the absence of a distraction from flood recovery and, as things stand, a favourable FX tailwind – especially in H1 – should all help year-on-year comparisons. We feel that overseas markets – including new licence agreements – offer stronger growth prospects than the UK in the near term. We have been more conservative with regard to FY18 revenue expectations, but this is compensated for by better prevailing underlying gross and EBIT margins such that our normalised PBT estimate is unchanged. We publish FY19 and FY20 estimates for the first time.

Exhibit 2: Walker Greenbank estimate revisions

EPS FD norm (p)

PBT norm (£m)

EBITDA (£m)

Old

New

% change

Old

New

% change

Old

New

% change

2017

12.7

12.9

+1.6

10.4

10.4

---

13.5

13.0

-3.7

2018e

15.9

16.1

+1.3

14.3

14.3

---

17.4

18.1

+4.0

2019e

N/A

17.0

N/A

N/A

15.2

N/A

N/A

19.1

N/A

2020e

N/A

18.0

N/A

N/A

16.0

N/A

N/A

20.0

N/A

Source: Edison Investment Research. Note: FY17: old = Edison pre-results estimate; new = actual reported.

Against our previous estimates, a slightly lower tax charge and higher expected number of shares (including expected deferred consideration) net out to give the EPS impact shown in Exhibit 2. Not shown in the above table, our dividend growth expectations are also somewhat higher than before.

Exhibit 3: Financial summary

£'ms

2013

2014

2015

2016

2017

2018e

2019e

2020e

January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

75.7

78.4

83.4

87.8

92.4

114.7

119.7

124.2

Cost of Sales

 

 

(30.2)

(30.3)

(32.7)

(35.9)

(36.2)

(45.0)

(46.9)

(48.7)

Gross Profit

 

 

45.5

48.1

50.7

52.0

56.2

69.7

72.7

75.5

EBITDA

 

 

8.6

9.7

10.7

11.8

12.7

17.4

18.4

19.3

Operating Profit (before GW, except. & LTIP)

6.6

7.5

8.3

9.1

10.6

14.6

15.4

16.1

Operating Profit (before GW and except.) - reported

5.8

6.5

7.3

8.2

9.8

13.6

14.4

15.1

Net Interest

 

 

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.3)

(0.2)

(0.1)

Intangible Amortisation - acquired

 

 

0

0

0

0

(0.3)

(1.0)

(1.0)

(1.0)

Pension net finance charge

(0.7)

(0.9)

(0.8)

(0.7)

(0.5)

(0.7)

(0.7)

(0.7)

Exceptionals

 

 

0

0

0

0

(1.8)

1.0

0.0

0.0

Other

 

 

0

0

0

0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

6.4

7.3

8.1

8.9

10.4

14.3

15.2

16.0

Profit Before Tax (FRS 3)

 

 

4.9

5.5

6.3

7.3

7.0

12.7

12.6

13.3

Tax

 

 

(1.0)

(0.5)

(1.2)

(1.5)

(1.6)

(2.7)

(2.7)

(2.7)

Profit After Tax (norm)

 

 

5.4

6.6

6.9

7.5

8.6

11.6

12.5

13.3

Profit After Tax (FRS 3)

 

 

4.0

5.0

5.1

5.9

5.4

10.0

9.9

10.6

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

57.5

58.5

59.3

60.0

62.7

70.2

71.0

71.4

EPS - normalised (p) FD

 

 

9.4

10.7

11.2

11.6

12.9

16.1

17.0

18.0

EPS - FRS 3 (p)

 

 

6.9

8.6

8.6

9.8

8.6

14.2

13.9

14.9

Dividend per share (p)

 

 

1.5

1.9

2.3

2.9

3.6

4.4

5.1

5.8

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

60.1

61.3

60.8

59.2

60.8

60.8

60.8

60.8

EBITDA Margin (%)

 

 

11.4

12.4

12.8

13.4

13.7

15.2

15.3

15.5

Operating Margin (before GW and except.) (%)

7.7

8.3

8.8

9.3

10.7

11.9

12.0

12.1

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

18.5

21.1

21.5

18.9

47.5

46.2

44.7

43.0

Intangible Assets

 

 

6.7

7.3

7.2

7.1

31.6

30.6

29.6

28.6

Tangible Assets

 

 

9.8

11.7

12.7

11.7

15.8

15.6

15.1

14.4

Investments

 

 

2.0

2.2

1.6

0.1

0.0

0.0

0.0

0.0

Current Assets

 

 

32.6

35.3

37.1

40.3

51.3

60.6

61.6

69.7

Stocks

 

 

16.8

18.4

22.0

18.1

30.3

31.6

33.0

34.2

Debtors

 

 

12.8

13.9

14.1

19.3

15.5

17.7

18.4

19.0

Cash

 

 

2.9

2.8

1.0

2.9

1.5

5.9

4.9

11.2

Other

 

 

0.1

0.2

0.0

0.0

 

 

 

 

Current Liabilities

 

 

(17.3)

(19.4)

(20.7)

(19.4)

(34.8)

(35.6)

(30.4)

(32.0)

Creditors

 

 

(16.9)

(19.0)

(20.3)

(19.0)

(28.0)

(28.7)

(30.4)

(32.0)

Short term borrowings

 

 

(0.4)

(0.4)

(0.4)

(0.4)

(6.8)

(6.8)

0.0

0.0

Long Term Liabilities

 

 

(9.6)

(10.2)

(10.9)

(4.5)

(12.7)

(9.9)

(7.1)

(4.1)

Long term borrowings

 

 

(1.4)

(0.9)

(0.6)

(0.2)

0.0

0.0

0.0

0.0

Other long term liabilities

 

 

(8.2)

(9.2)

(10.4)

(4.3)

(12.7)

(9.9)

(7.1)

(4.1)

Net Assets

 

 

24.2

26.9

26.9

35.3

51.3

61.3

68.8

76.6

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

6.0

6.2

3.5

7.1

12.4

13.5

15.4

16.3

Net Interest

 

 

(0.2)

(0.2)

(0.2)

(0.1)

(0.2)

(0.3)

(0.2)

(0.1)

Tax

 

 

(0.0)

(0.0)

(0.0)

(0.6)

(2.3)

(2.7)

(2.7)

(2.7)

Capex

 

 

(3.1)

(4.7)

(3.2)

(2.5)

(6.7)

(3.5)

(3.5)

(3.5)

Acquisitions/disposals

 

 

0.0

0.0

0.0

0.0

(27.1)

0.0

0.0

0.0

Financing

 

 

(0.1)

(0.0)

(0.4)

(0.1)

18.3

0.0

0.0

0.0

Dividends

 

 

(0.7)

(0.9)

(1.1)

(1.4)

(1.8)

(2.6)

(3.2)

(3.7)

Net Cash Flow

 

 

1.8

0.3

(1.5)

2.3

(7.4)

4.4

5.8

6.3

Opening net debt/(cash)

 

 

0.7

(1.2)

(1.5)

(0.0)

(2.3)

5.3

0.9

(4.9)

HP finance leases initiated

 

 

0.0

0.0

0.0

0.0

(0.0)

0.0

0.0

0.0

Other

 

 

0.0

0.0

0.0

0.0

(0.2)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(1.2)

(1.5)

(0.0)

(2.3)

5.3

0.9

(4.9)

(11.2)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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