Portmeirion is a small well-known English pottery company based in Stoke-on-Trent.
The company was founded in 1960 by the legendary pottery designer Susan Williams-Ellis It is a market leader in ceramic tableware, cookware and giftware, glassware, candles, placemats, coasters and manufactures ceramics. Its brands include Portmeirion, Spode, Royal Worcester and Pimpernel. It has around 500 staff, including a subsidiary, which distributes products from Connecticut and a showroom on Madison Avenue in New York. Portmeirion’s most renowned design has been Botanic Garden. It was launched in 1972 and combined images from old botanical books with floral patterns. As 2010 is the 50th anniversary of the company, Portmeirion have used this opportunity to introduce the Portmeirion Originals collection. This should serve as a tribute to the company’s founder Susan Williams-Ellis, who died in 2007. The designs include among others: Malachite, Dolphin, Totem and Magic Garden.
The company’s shares are listed on the London AIM Market and can be found under the Bloomberg ticker PMP:LN
COMPANY MANAGEMENT AND TRACK RECORD
The company seems to be well-managed and the management are excellent communicators in all their dealings with shareholders. We are particularly impressed by the honesty and openness of their trading updates and additional information which is provided at the time of the AGM. It is a pity that other companies fail to appreciate who the real owners of the businesses are. The Directors do have an interest in their company and hold 2.8% of the issue share capital. The most recent acquisitions were in October, November 2009 and April 2010.
We looked at the company’s numbers for the last 17 years from 1993 to 2009. In only one year. i.e. 2004, did the company make a loss after tax. The company has a decent dividend yield and has continued to pay out a dividend throughout this 17 year period, including the one year of negative earnings in 2004. The dividend per share remained unchanged at 13.25p for the 10 years through 2005, but has been raised in three of the last four years, which must be encouraging for the rating of the company going forward.
Looking at the efficiency of the company’s capital management we see that things have not improved over the long-term. Indeed it is probably fair to say that things were much better in the 1990s. Between 1993 and 1996 the annual return on capital employed (“ROCE”) varied between 18.6% and 19.6%. Thereafter the company seemed to lose track of itself and the ROCE never again exceeded 15%. There has been a minor recovery over the last 5 years but the average ROCE from 2005 to 2009 has only been 9.19%. However, there is certainly hope that the recent acquisition has been – to use the management’s words – “transformational”.
The management’s prudent approach is to be commended, particularly when they are surrounded by companies which have indebted themselves and been stripped by the private equity “carpet-baggers”. However, shareholders’ best interests are not best served, if the cash is retained in the Group and it does not even achieve an ROCE of 5%, being comparable to the yield on a long-dated bond.
One of the key measures used by Ben Graham in his Security Analysis was the ratio of Turnover to Capital Employed. This shows whether a company is overcapitalised or if there has been a change in the nature of the business. In the mid-1990s this ratio stood at 1.6 times for Portmeirion, but from 1997 to 2003 this ratio had strangely dropped to a range of 1.1 to 1.26. When read together with the poor ROCE above we believe this supports the argument that the company was overcapitalised. Things though have picked up with the Turnover/CE ratio rising from 1.41 times in 2004 to 2.11 in 2009. In our opinion this reflects a turnaround in the management of the company. Furthermore, we hope that this higher level will be maintained in 2010 and that the shares will in turn be re-rated upwards so that they will no longer be trading on market value to turnover ratio of less than 1 (currently 0.86 times).
INCOME STATEMENT
y/e 31st Dec. 2005 2006 2007 2008 2009
Turnover (£m) 27.55 28.42 32.02 31.84 43.17
Profit after tax 1.06 1.75 3.03 0.58 2.45
EPS p 10.57 17.81 30.77 5.81 24.73
Div p 13.25 14.00 14.70 14.70 15.80
Source: Company reports
Brokers are reckoning with a turnover of £47m and £49m for 2010 and 2011 and for earnings per share of 30.9p and 34.80p respectively. The company has no debt and generated £4.7m in operating cashflow in 2009. The ROE was 13.1% for 2009.
The acquisition of the trade names of Royal Worcester and Spode from The Porcelain and Fine China Companies Limited and the US inventory of Royal Worcester and Spode Limited in April 2009 year was funded entirely out of the company’s own cash reserves. It is reassuring to know that the company’s Management know not only what type of business they can bolt onto the Group, but that they also have the courage and good sense to buy value, as they made the acquisition at a time when the UK economy was in the midst of a deep recession.
There is a decent dividend yield of 4.3%. The dividend of 15.8p for 2009 was covered 1.6 times. In our valuation below we have assumed a Dividend Payout ratio of 45% of earnings.
TRADING UPDATE
In its final results statement for 2009 issued on 23rd March 2010, the non-executive Chairman Dick Steele commented that the acquisition made in April last year had “transformed the prospects of the Group and added £1.5 million in revenue over and above the £7 million we said it would”. He wrote of the huge potential for the Spode and Royal Worcester brands. He added that the first two months of the current year showed a 40% increase over the corresponding period last year. Some indication of the breakdown of this growth was given as it was separately stated in the report that resulting from the highly successful acquisition, the new Spode and Royal Worcester patterns accounted for 20% of sales. Furthermore, the manufacture of some Spode product had been brought back to the UK. On the costs side it was stated that the total workforce had increased by 9%, whereas revenue was showing a 36% increase.
At the company’s AGM, on 20th May 2010, Dick Steele confirmed that this “trend has continued for the four months ended 30 April 2010 and … sales remain 40% higher than the prior period”, although he noted that half of this increase was attributable to sales of Spode and Royal Worcester which were not in the comparable period last year, due to the acquisition. He concluded by stating that “despite the uncertain economic environment, we remain positive on the outlook for the remainder of 2010.”
WHAT IS THE BUSINESS WORTH?
When Portmeirion acquired the new brands in April 2009 they stated that they expected to achieve revenues of £7 million from Spode and Royal Worcester in 2009 and £12 million in 2010. In actual fact they achieved revenues of £8.5 million in 2009. Moreover they expect the Spode and Royal Worcester brands to generate revenue increases for years to come. Brokers are currently pencilling in a turnover of £47m for 2010 and £49m for 2011 and profits after tax of £3.07m and £3.45 m for these respective years. Turnover for 2009 was £43.17m (2008: £31.8m) and profit after tax of £2.66 m (excluding exceptional items). £8.5m of the increase in annual turnover, i.e. a 27% increase over 2009 turnover, came from the acquired brands. Based on the acquisition date of 23rd April, we assume that a full year’s contribution from the new brands would have contributed £12.75m to revenue, which is 6% higher than the company’s forecasts for 2010. Adding the extra £4.25m for the missing 4 months to the 2009 turnover number gives us £47.4m. Therefore the 2010 number must be at least this plus 5% growth, i.e. £49.8m. To check the reasonableness of these estimates we looked at the results for the second half of 2009 which included a full contribution from the new brands, but may include seasonal effects. These showed a turnover of £26m and profits after tax of £2.1m. Assuming that 52% of turnover is generated in the second half year then 2010 could easily achieve a turnover of £50m for 2010.
Portmeirion will probably release its interim results about 10th August as they did last year. We expect turnover for the six months ended 30th June 2010 to be at least £21.8m, which would be a 28% increase over 2009. At present brokers are only estimating a growth rate of 8% in earnings for this year. A broker upgrade should follow the interim numbers and the market may well re-rate the stock upwards as its current 2010 PE ratio only implies a meagre growth rate of 3%, whereas we see turnover rising by at least 15% in 2010 and continuing to grow at 10% for the foreseeable future.
We have used a discounted earnings model to value Portmeirion. We used the brokers’ estimates for 2010 and 2011, although we consider them to be conservative. From 2012 onwards we used our own numbers. These were based on the assumption that earnings per share will grow at an annual rate of 10% per annum. We consider this growth rate to reasonable in view of the historic growth rate and the tremendous growth rate achieved over the first four months of 2010 which are not fully reflected in broker’s estimates for 2010. We value the company at 505p, which represents a potential upside of 35% to the current offer price of 375p.
CONCLUSION
We think that buying Portmeirion means acquiring some excellent pottery brands. The management does seem to have had problems managing its capital over the years, but we think they are dealing with this now. The stock is fundamentally cheap, pays a nice 4.3% dividend yield, has no debt and has recently made a transformational acquisition, which should result in the stock being re-rerated after the interims for the 6 months to 30th June 2010 are released and make the full benefits of last year’s acquisition more obvious.