Colefax has now released its interim results for the year ending 2016.
The income statement is a bit scant on detail but we see that revenue increased by £545K and operating costs grew by £158K to give an operating profit £387K ahead of the first half of last year. Tax increased somewhat which meant that the profit for the half year came in at £2.3M, a growth of £313K year on year.
When compared to the end point of last year, total assets grew by £1.9M, driven by a £1M increase in inventories and a £916K growth in cash. Total liabilities were broadly flat as a £181K decline in payables was offset by a £194K increase in current tax liabilities. The end result was a net tangible asset level of £25.7M, a growth of £2M over the past six months.
Before movements in working capital, cash profits increased by £439K to £4.3M. There was a cash outflow from working capital, with a large growth in inventories which meant that after tax payments increased slightly, the net cash from operations came in at £2.3M, a decline of £498K year on year. The group then spent £1.1M on capex to give a free cash flow of £1.2M which was more than enough to pay the dividends of £248K to give a cash flow of £985K and a cash level of £7.8M at the period-end.
Trading conditions in the core Fabric Division became progressively more challenging during the first half and overall fabric division sales increased by 0.8% but fell by 1.5% on a constant currency basis. The improvement in operating profit was partly due to lower first half losses in the decorating division and partly due to the strength of the US dollar.
Operating profits in the Fabric Division increased by 5% to £3.35M, helped by a stronger dollar which benefits margins in the US market. The major market trends during the period have been a levelling off in US sales against strong prior year comparatives, a larger than expected decline in UK sales and the first tentative signs of a recovery in Europe.
Sales in the US, which represent 59% of turnover in the division, increased by 7% in reported terms but decreased by 1% on a constant currency basis. Whilst the general economy remains healthy, it is not yet clear how higher interest rates will affect housing market activity. The group are continuing to invest in the US market and over the next year and a half they will be opening their own showrooms in Atlanta and Boston which are the last two major US territories where they have traditionally sold through agents rather than direct to customers.
Sales in the UK, which represent 19% of turnover, were down 4%. Trading was more challenging than expected at the start of the year and the board believe that the high end housing market is being affected by the increase in stamp duty in December which has substantially reduced the number of high end housing transactions which are the key driver of sales.
Sales in Continental Europe were down 11% on a reported basis and 3% on a constant currency basis. Trading improved slightly during the period and there are signs of recovery in a number of markets suggesting that the weak Euro combined with quantitative easing is started to have a positive impact on the economy. The performance by country remains very mixed. The largest market, France, saw sales decline by 1% which was better than expected in a challenging trading environment. Sales in the rest of the world increased by 7% as weak sales in Russia and China were more than offset by a strong performance in the Middle East but overall these marets remain a small part of total sales.
At kingdom Sofas, sales for the half year increased by 4% to £1.26M and operating profit increased by 16% to £74K. Although market conditions are competitive the board believe that there are opportunities to grow sales and profits from a relatively low base and at the half year point, the forward order book was 8% ahead of last year.
Decorating sales increased by 7% to 3.4M and the division made a reduced first half loss of £148K compared to £365K last time. Decorating profits have been impacted by an increasingly difficult market for antiques which form part of the division. Antique sales during the first half of the year were down by 29% to £458K. The long lease at the flagship showroom in Mayfair is coming to an end in December and the landlord has indicated it will not be renewed. The group have identified suitable new premises in Pimlico and plan to relocate the decorating division in the latter part of 2016. The premises are smaller than the current location and they will use the move to significantly reduce the scale of the unprofitable antiques operation.
The recent trends in the two major markets of the UK and the US suggests that the group are entering a period of more challenging market conditions. Together with the turbulence in global markets that has marked the start of 2016, the board are cautions about prospects for the remainder of the year and going forward, trading conditions in the second half are expected to be more challenging. Although the first signs of recovery are being seen in Europe, it is unlikely to have a significant positive impact on the group’s overall results and although the recent strengthening of the US dollar is positive for the fabric division, this is balanced against the impact of rising interest rates on the US housing market and wider economy.
At the period-end, the group has a net cash position of £7.8M compared to £4.7M at the same point of last year. After a 5% increase in the interim dividend, the shares currently have a yield of 1% which is predicted to remain the same for the year as a whole. At the current share price the shares trade on a PE ratio of 14.2 which reduces to 12.3 on the full year prediction.
Overall then, this was a good six month period for the group. Profits were up, net assets increased and although the operating cash flow did fall, this was due to a growth in inventories and cash profits rose and there was plenty of free cash generated. A lot of this good performance was due to the strength of the UK dollar, however, and the trading conditions in the fabric business worsened as the period progressed. In the UK, a fall in sales is being blamed on the increase in stamp duty for high end properties whilst the increase in interest rates in the US is expected to affect sales there.
The small sofas business performed well, however, and the group recorded a smaller loss in the decorating business despite continued problems within the struggling antiques business. Going forward, the board see H2 as being more challenging and while the forward PE ratio of 12.3 looks good value, the 1% dividend yield doesn’t really add much and until the uncertainty around H2 performance is dealt with, I will hold off buying here I think.