Walker Greenbank is an English luxury interior furnishings group which designs, manufactures, markets and distributes wallcoverings, furnishing fabrics and associated products for the consumer market. Its brands include Sanderson, Morris & Co., Harlequin and Zoffany.
The original business C&W Walker Holdings Limited, was founded in 1899 and was an engineering company which manufactured gas containers. After merging with engineer Greenbank Group PLC in 1986 the now familiar entity of Walker Greenbank PLC was formed and was listed on the London Stock Exchange. In 1987 Wallcoverings International was acquired, which included the wallpaper manufacturer Anstey Wallpaper Company and the Harlequin and Zoffany brand names. The group decided to focus on the wallpaper and home furnishings market and the original engineering businesses were sold in 1990. Then in 1998 another decision was made to concentrate on the home furnishings market, with the result that the commercial wallcoverings division was sold. The Anstey Wallpaper Company and Sileby Screen Print businesses were consolidated and moved into the current factory at Loughborough in 2000. In August 2003 the group acquired the trade and certain assets of Arthur Sanderson & Sons, including the prestigious Morris & Co brand.
The brands are targeted at the mid to upper end of the premium market. They have worldwide distribution capacities including their prestigious showrooms at Chelsea Harbour, London and the D&D building, Manhattan, New York. Half of the brands’ turnover is sourced in-house from the Group’s own specialist manufacturing facilities. The brands include: Harlequin, Morris & Co, Sanderson, and Zoffany. Sanderson was founded in 1860 and was granted a Royal warrant in 1923. Sanderson is one of the most renowned brands in interiors worldwide, offering a classic, inspirational product often based on documents from its extensive archive. It is aimed at the mid to upper end of the interiors market. The Morris & Co. business has a heritage that dates back to the mid 19th century when it was founded by William Morris, the acclaimed designer.
The second part of Walker Greenbank’s business is the Manufacturing division. This comprises two units: Anstey Wallpaper Company and Standfast & Barracks.
Anstey Wallpaper Company is the world’s leading specialist commission printer. The business operates at the premium end of the market, offering a combination of design, printing and finishing of wallcoverings by gravure, rotary, flexo, surface, screen and hand block printing methods. As well as production for the Walker Greenbank brands, Anstey also produces wallpapers for third party customers.
Standfast and Barracks dye works in Lancaster was bought by Walker Greenbank PLC in March 2000. The business is the worldwide leader in its field. Standfast specialises in high quality volume vat printing and dyeing, and rotary screen-printing of fabrics. Barracks specializes in flatbed printing, concentrating on very high specification for the exclusive furnishings and apparel markets, printing on a wide range of fabrics. In 2001 the group acquired Strines Textiles, a market leader in high quality specialised printing of technical fabrics for supply of camouflage to the military.
Walker Greenbank group has altogether around 529 staff including Directors.
The company distributes its products and sampling worldwide from Tilbrook in Milton Keynes, where they operate a 60,000 sq. ft. warehouse. All of the brand’s products are received here. Then they are labelled and sorted for onward sale to the network of retailers in UK and their worldwide customer base. This centre of excellence can usually deliver both samples and products within 48 hours of receiving an order.
The company’s shares are listed on the London AIM Market and can be found under the Bloomberg ticker WGB:LN
COMPANY MANAGEMENT and TRACK RECORD
The company appears to be well-managed and the management are good communicators with their shareholders. We are impressed by the openness of their trading updates and additional information which is provided at the time of the AGM. It is a pity that other companies do not take advantage of such opportunities to inform the real owners about how their business investments are doing. The Directors do have an interest in their company and hold 3.8 percent of the issue share capital. Their most recent acquisitions were in April 2010, although they were small amounts.
We looked at the company’s numbers for the last 10 years from 2001 to 2010. Over the first 5 years 2001-2005 the company made a loss before and after tax in every year. This was followed by 5 profitable years from 2006 to 2010. The company paid a dividend in 2001, but due to losses it decided not to return to the dividend arena again until 2010. This resumption of the dividend payments, which are well covered, together with the confident statements being issued by management, must be encouraging for the rating of the company going forward.
We used Ben Graham’s ratio of Turnover to Capital Employed to show whether the company is overcapitalised or if there has been a change in the nature of the business. In 2004 this ratio stood at 2.3 times for Walker Greenbank, whereas the ratio was 2.34 and 2.49 times capital employed for 2009 and 2010 respectively. We believe this supports the argument that the company’s core business has shown no real change in its nature over the last five years and that it is not overcapitalised. As regards profitability we also calculated the ROCE for the last two years using a tax-adjusted operating profit to capital employed ratio. This fell from 11.9 percent in 2009 to 6.95 percent in 2010. These numbers are obviously better than the loss-making position of the business from 2001 to 2005, but they still show that profitability has been a problem. In particular the group’s net profit margins have not been as strong as one would normally expect from premium brand names, with the manufacturing and printing in particular bringing in very little profit. However, from the AGM on 28th July 2010 it appears that the higher level of profitability which started in the last 6 months of the financial year to 31 January 2010 has been maintained into the first half of the 2011 financial year. On this basis the shares should be re-rated upwards so that they will no longer be trading on the current market value to turnover ratio of less than 1 (currently 0.3 times).
INTERIM RESULTS for the 6 Month Period ended 31st JULY 2010
At the company’s AGM, on 28th July 2010, Walker Greenbank’s Chairman Terry Stannard gave a trading update for the first half of the financial year in which he said that the turnover would be at least £33 million. In fact the number turned out to be £33.67m, an increase of 15.6 percent on last year. These results were “significantly ahead of management expectations”, which is a very positive sign indeed.
Both the brands and manufacturing divisions performed well. Continuing the trend seen last year, the mid-market Harlequin and Sanderson brands both performed strongly, with sales of Sanderson being up 17 percent on H1 last year, as the brand celebrated in its 150th anniversary. Moreover, there was growing appeal for its recently re-launched collections. For those who are interested the Sanderson anniversary was celebrated in an article in The Financial Times on 20th March 2010, under the theme Wallpaper’s Return to Popularity. Management were also encouraged by the fact that the premium-end brand Zoffany had returned to growth in the first half of the year and that the sales of printed fabrics across their brands had continued to grow.
Total Brand revenues increased 13.3 percent to £23.5 m in the first half. Harlequin achieved revenues of £10.2 m, up 13.6 percent on H1 2009.
The Manufacturing Division benefitted from growing demand for printed fabric and wallpaper, with half year sales up 27 percent. As the Chairman said in July, the performance of fabric printing and wallpaper manufacturing operations in the first half was particularly pleasing and manufacturing benefited from a good level of order intake, from customer restocking and from the reorganisation last year. Revenues at Anstey, the wallpaper printing business, were up 29% at the half year to £6.0 m. Revenues at Standfast, the fabric printing factory, were up 26% at the half year to £7.36 m. Standfast has ordered its third digital printer to meet the increasing demand.
Of the total increase in sales we calculate that 35 percent came from the UK retail operations and that 40 percent came from the manufacturing division. We were not surprised that the UK did so well. We noted an article in the Financial Times on 17th April 2010 which had the title “London luxury property market stages recovery.” Indeed this incredible renaissance, which was driven by Asian and European (in particular Greek) buyers, was one of the principal reasons why we were so keen on Walker Greenbank’s shares over the last 6 months.
Operating profits before exceptionals were up substantially from £1.05 m in the H1 2009 to around £2.06 m for the six months to July 2010. This was in line with the £2 m indicated in July’s trading update. The post-exceptional operating profits were up from £1.01 million in the first half last year to £2.56 m, which is higher than the £2.4 m indicated in the trading statement.
Profit before tax in the six month period was £2.3 m, which was higher than the trading guidance of £2.1 m, and was a four-fold increase on the £0.57 million reported in the first half last year.
The Chairman concluded his statement on the interim results by saying: “the momentum in our first half sales has continued, and we have traded well in the first ten weeks of the second half. We enter the autumn selling period with confidence of delivering a strong full year performance.
The earnings per share for the six months ended 31st July 2010 was 2.72p. This compares with 0.77p for H1 2009 and 2.1p for the 12 months ended 31st January 2010.
Net debt at 31st July 2010 was £3.42 m, representing a very acceptable 17.3% of net assets. Only £0.4 m of debt is due within 12 months and the company has adequate facilities available. Operating Cash amounted to £1.05 during the 6 months to July. Of this £1.1 m was spent on acquiring fixed assets, so that net debt was little changed over the period.
WHAT IS THE BUSINESS WORTH?
On the basis of Walker Greenbank’s interim results turnover and profit after tax were £64.9m and £2.3m respectively for the 12 months to July 2010. Brokers have increased their estimates for turnover from £62m 6 months ago to £65m (an increase of 7.65 percent on last year) and upped profit after tax from £2.26m to £2.73m for the year to 31st January 2011. Broker upgrades largely took place during the last month, so a further upgrade may well follow the interim numbers. Now that the market has finally raised its EPS numbers for 2011 and 2012, it may well re-rate the stock upwards from its current 2011 PE ratio of 8.2 (Recall it was 7.7x the last time we wrote). The current PE still implies a growth rate of 0 percent, although we see turnover rising by at least 7.5 percent in the year to January 2011 and expect it to continue growing at five percent for the foreseeable future.
We have used a discounted earnings model to value Walker Greenbank. We used brokers’ estimates for the years to January 2011 and 2012, although we consider them to be conservative. From 2013 onwards we assumed that earnings per share will grow at an annual rate of 5 percent per annum. We consider this growth rate to reasonable in view of the improvements in productivity and the tremendous growth rate achieved over the 12 months to 31st July 2010 which are not fully reflected in broker’s estimates for 2011. We have raised our valuation for Walker Greenbank from 60p to 65p, which represents a potential upside of 60% to the current offer price of 40.5p.
CONCLUSION
We think that buying Walker Greenbank means acquiring some excellent brands in the luxury interior furnishing and wallpaper markets. The management have proved with their interim results to July 2010 that Walker Greenbank has definitely turned the corner and that luxury brands are going through a renaissance which is driven by foreign demand for the premium end of the London residential market. The stock is fundamentally cheap with the market value representing only 36 percent of sales for 2011 and Walker Greenbank has recommenced paying dividends after a 9 year absence. The company’s gearing is a lowly 17 percent of shareholders’ funds and could be quickly eliminated if the company continues to generate high cashflow. Finally the Chairman’s confident statement on current trading give us grounds to expect the stock to be re-rated to a much higher level in the coming months.