Shares I looked at this week (15 Dec 2024)
My thoughts on three shares on my watchlist that I looked at recently - Churchill China, Ingenta, and Sanderson Design. What do you think?
Churchill China #CHH $CHH.L
Profit warning came at the end of Nov24. Not surprising, as the company had already forewarned in their HY results. Pretty bad, -30% to FY Dec24 and FY25. With brokers expecting no improvement in FY25 from FY24. Is this the bottom?
Hospitality, restaurants are key drivers for growth and demand for their products. No surprise in FY24 that they are under pressure on input costs like dining ware. There is also no improvement in momentum going into FY25, according to the latest Barclays spend reports.
FY25 will also bring input cost pressures, in terms of NI and wages. Both for Churchill China and also for their customer base.
Yet, this company is pretty solid. Still profitable. Healthy operating margin, even after taking a hit in FY24 and FY25.
Management are confident they have a differentiated, high quality product. So really blaming everything on soft demand. Although revenues are higher now than pre-COVID, EPS has yet to recover, but this is all driven by lower operating profit margin. 12-13% instead of 15-17%. Is this structural? Can they recover margin at some point? No indication in their HY or trading update that this is what management are planning to do. So can the high PE rating pre-COVID, of 15x+ PE, ever come back? I don’t think so, given the lower margins currently.
So what is a fair valuation range for this company? Churchill China clearly has some strengths. Solid balance sheet. NTAV of 525p. Still good operating margins. Supposedly a strong player. Albeit if they are so strong, why do they have low market share after all these years and the industry still so fragmented?
I’d definitely be happy to buy around NTAV (525p) or lower. At 700p+, still looks pricey to me given that FY25 EPS is flat YoY and so the doom and gloom is set to continue for another 12 months. The 200d MA has been trending down since early 2022, so plenty of stale bulls here and frustrated shareholders.
Ingenta #ING $ING.L
This has been shifted to the bargepole box for me, at least until the next update on H2 results. Why?
The last trading update strongly hinted a H2 weighting, hoping for one-off client projects to pick up. There seemed a great deal of uncertainty still.
On top of that, a large shareholder, Kestrel Partners, with 20%+ looks to have thrown in the towel here. Recently, their board representative has stepped down, without a replacement nominated. Then they sold down from 22.5% to 21.5%. The shares are very illiquid, so this will be an overhang that weighs heavily on the share price. In fact, it has already done so, with the shares down from 80p to 71.5p since Kestrel announced their latest reduction.
There is net cash on the balance sheet, and 87% of revenues are recurring, and they are still making a healthy c10% PBT margin. So it is not a burning platform, but also no strong catalyst here IMO. If another profit warning comes, and PBT run-rate ends up being £0.5-£0.8m a year, then it is hard to see how this justifies more than a mid-to-high single digit PE and the shares are vulnerable to drop further to the 50p mark from the current 71.5p.
Sanderson Design #SDG $SDG.L
I have been tracking this share for a while, as it looked poised to completely transform its business model. Historically, the majority of profits came from producing their own products (eg home wallpapers) from their archive of historic design patterns. Most famous of which is the Morris & Co collection, created by the famous designer William Morris.
However, recent years saw a focus on expanding the licensing income stream, to the likes of John Lewis, NEXT, Habitat, etc. For the creation of other homeware and other products using their archive of designs.
Asset backing here is very good, with 83p NTAV according to my calculations. And that excludes their most valuable asset of all, the designs and patterns they own and can license out. Shares currently trade at 61p.
However, their “Brand” division, where they manufacture their own products, has been on a steep decline and continues to be a millstone, with no end in sight. A housing market recovery and increased consumer renovation activity will be the catalyst here. However, many other players in this RMI (Repair, Maintenance, Improvement) space have reported continued weak consumer demand, so there is no relief in sight yet.
On the licensing side, after an amazing year last year signing up lots of new partners, this year has been soft. In fact, since Apr24 there has no been no news about new contracts or even renewals. Where is this growth engine?
No wonder the shares have been steadily declining from 100p in Jun24 to 61p currently.
I suspect, with the lack of activity on new licensing deals, that the H2 results (to Jan25) is in jeopardy of missing broker forecasts. The Brand division probably hasn’t had a pick up in trading either. So there is no growth engine. The shares are already very lowly rated at 7.5x PE, but historically (in 2018-2019) has gone sub 5x PE. So if there is a profit downgrade, it is not inconceivable that we see a 10-20% EPS hit, as well as a 10-20% hit from PE multiple contraction. Ouch.
On top of that, we have a large shareholder, Schroders (4.6%) who has decided to throw in the towel in the past week and start selling down their stake. This will cause prices to be depressed for a while longer, given the illiquidity of the shares.
There is also no director buying to speak of even at these bargain basement prices.
Still, the NTAV backing and the highly valuable design archive will support prices here. I continue to monitor for an attractive entry point, but I do think a profit warning for FY Jan25 is on the cards here.
Thoughtful and well-informed work. Thank you! Totally agree here, and would add Churchill need a recovery in hospitality to see a meaningful improvement, and that seems a long way off in the UK.