Colefax have now released their final results for the year ended 2018.
Revenues increased when compared to last year due to a £4.3M growth in decorating revenue, a £1M increase in fabric revenue and a £270K increase in furniture revenue. Cost of inventories increased by £925K and other cost of sales grew by £2.8M to give a gross profit £1.9M higher. Distribution and marketing costs declined by £211K and there was a £1.3M reduction in exchange losses. This was offset by a £256K loss on disposal of assets and a £1.2M growth in other admin costs to give an operating profit £1.8M higher. Finance costs were broadly flat but tax charges declined by £155K which meant there was a profit for the year of £3.8M, a growth of £1.9M year on year.
When compared to the end point of last year, total assets increased by £614K driven by a £2.5M growth in cash, a £191K increase in prepayments and accrued income and a £148K increase in inventories, partially offset by a £727K decline in leasehold improvements, a £461K decrease in trade receivables and a £405K decline in other receivables. Total liabilities declined during the year as a £734K growth in accruals and a £519K increase in trade payables was more than offset by a £1.2M improvement on the forward currency contracts and a £723K decrease in the deferred tax liability. The end result was a net tangible asset level of £27.4M, a growth of £1.5M year on year.
Before movements in working capital, cash profits increased by £2M to £7.7M. There was a cash inflow from working capital and the tax payment reduced by £336K which meant that the net cash from operations was £7.9M, a growth of £5.1M year on year. The group spent £2.4M on property, plant and equipment to give a free cash flow of £5.5M. Of this, £2.2M was spent on share buy backs and £488K on dividends to give a cash flow of £2.9M for the year and a cash level of £9.2M at the year-end.
The overall improvement in profit has three main reasons – losses on hedges put in place prior to Brexit reduced by just over £1M to £959K and have now come to an end; the decorating division delivered an exceptional performance, increasing profits by nearly £800K and in the core fabric division, sales in the main US market increased by 6%. Profits were also aided by a £350K deferred tax benefit relating to the reduction in the US corporate tax rate.
Sales in the Fabric division were up 1.5% or 3.3% at constant currency. The operating profit increased by 32% to £3.7M due to the reduction in hedging losses. Excluding this, operating profit declined by 3% to £4.7M reflecting unfavourable forex movements. The main reason for the increase in sales was an improvement in trading conditions in the US which increased by 6% following last year’s 8% decline. Sales in the second half of the year increased by 8% compares to 4% in the first half. The improving trend reflects the strength of the US economy and in particular the housing market.
Sales in the UK increased by 1% despite increasingly challenging trading conditions at the top end of the market. High rates of stamp duty continue to weigh on the number of housing transactions and the situation is not being helped by Brexit uncertainty. They are currently refurbishing their trade showroom in Chelsea Harbour which is expected to be completed by the end of August.
Sales to continental Europe increased by 3.5% but were flat at constant currency. Despite increased optimism in the first half, overall market conditions have remained difficult and seem unlikely to improve in the short term. This is especially true in France, Germany and Italy, and despite some improvement in the wider economy, in France sales reduced by 2%. In Germany sales were flat and in Italy they declined by 1%. Sales in the ROW decreased by 8% mainly due to the Middle East where contract orders can cause significant sales fluctuations from year to year.
Sales in the Furniture division increased by 11% and the operating profit was £130K, a growth of £107K year on year. The increase was achieved despite challenging market conditions in the UK and the order book at the year-end was significantly ahead of the prior year. Export sales account for just 13% of total furniture sales and represent a growth opportunity given the current weakness of sterling.
Decorating sales increased by 53% and pre-tax profit was up £793K at £901K. Last year the business moved to a new showroom and offices in Belgravia. This was the first full year of operation at the new premises and the board are pleased with the performance. The new showroom is popular with customers and a more selective approach to antique sales meant they have exceeded expectations. Several major contracts were completed during the year and although customer deposits remain healthy, they expect activity to return to more normal levels next year.
Going forward, the largest market, the US, is showing signs of continued growth which should underpin the performance this year. In addition they no longer have any hedging contracts put in place prior to the Brexit referendum and will benefit from the current weakness of sterling. In the UK and Europe they are experiencing increasingly difficult trading conditions and they expect this to offset some of the expected growth in the US. In addition, they expect their decorating division to return to a more normal level of activity following an exceptional performance in 2018.
At the year-end the group had a net cash position of £9.2M compared to £6.7M at the end of last year. After the dividend increased by 4%, the shares are yielding 0.8% which increases to 0.9% on next year’s consensus forecast. At the current share price the shares are trading on a PE ratio of 15.8 which rises to 16 on next year’s forecast.
On the 13th September the group released a trading update where they said that trading since the year-end had been in line with expectations. In the fabric division, sales in the US in the first four months of the year increased by 4% on a constant currency basis. In the UK, sales decreased by 3% and in Europe they decreased by 5%. Whilst the group are optimistic about continued growth in the US, they expect trading conditions in the UK and Europe to remain relatively challenging.
Overall then this has been a good performance from the group. Profits were up, net assets increased and the operating cash flow improved with a decent amount of free cash being generated. The core US market is performing well but conditions are far more subdued in the UK and the rest of Europe. The stellar performance in decorating is unlikely to be repeated but the group should benefit in the coming year from the lack of hedging losses. The forward PE of 16 and yield of 0.9% are not that cheap and on balance I feel the group is a little too dependent on the US market, albeit this is performing well. Tough but I’d like to see the price come down a bit before buying in.