Colefax has now released their interim results for the year ending 2017.
Revenue increased by £1.5M due to forex movements (they declined at constant currency) when compared to the first half of last year and after operating costs increased by £2.9M, not helped by hedging losses following the decline in sterling (£755K), the operating profit was down £1.4M. Tax charges declined by £321K which gave a profit for the period of £1.3M, a decline of £1.1M year on year.
When compared to the end point of last year, total assets increased by £4.2M driven by a £3.4M growth in receivables, a £1.6M increase in property, plant & equipment and a £1.3M growth in inventories, partially offset by a £2.1M decline in cash. Total liabilities also increased during the period due to a £5.4M growth in payables and a £544K increase in deferred rent. The end result was a net tangible asset level of £24.6M, a decline of £1.7M over the past six months.
Before movements in working capital, cash profits declined by £1.1M to £3.2M. There was a cash outflow from working capital, but a bit less than last time and after tax payments were broadly flat, the net cash from operations came in at £1.4M, a decline of £857K year on year. This did not cover the £1.7M spent on capex so there was a cash outflow of £238K before financing. The group purchased £2.6M-worth of their own shares and paid out £244K in dividends to give a cash outflow of £3.1M in the period and a cash level of £8M at the period-end.
Sales in the fabric division increased by 4.7% but decreased by 7.3% on a constant currency basis. Excluding hedging losses of £755K operating profits decreased by 18.5% to £2.7M reflecting difficult trading conditions in the core US market. Sales in the US were down 10% on a constant currency basis, reflecting uncertain trading conditions in the run up to the election. The group have continued to invest in the US market, however, and opened their new showroom in Boston in October and will open another in Atlanta in February.
Sales in the UK were up 1% and so far do not seem to have been adversely affected by the Brexit vote. The group are concerned by the slowdown in high end housing transaction as a result of the increase in stamp duty, however, because trading tends to lag changes in the high end housing market.
Sales in Continental Europe were down 6% on a constant currency basis (but up 9% on a reported basis). Trading conditions overall remained challenging but there were some significant variations between countries. In the largest market France, sales increased by 4% which was better than expected due to a significant contract order in the period. In Germany, sales declined by 1.6% and in Italy, sales fell by 0.2%. Sales in the ROW decreased by 14% at constant currency.
Furniture sales decreased by 9% to £1.2M with all of the decline attributable to a contract order in the prior year. Operating profit was just £9K, a decline of £65K and the order book was down 6% at the period-end, although it is currently ahead of last year despite very competitive market conditions for high end furniture.
Decorating sales increased by 3% during the period and the division made a reduced loss of £84K, an improvement of £64K. The division has a demanding six months due to the preparations for the move out of its current base to new premises. The office move was completed in December and the new showroom will open in February. The business will continue to sell antiques but on a smaller scale and lower inventory. The board are optimistic about trading prospects at the new location. Customer deposits increased throughout the period and remain at a healthy level. The devaluation of Sterling has increased the attractiveness of the business to overseas customers.
The decision to hedge their US dollar exposure incurred £755K of losses during the period and will continue to adversely affect results this year and next with charges of £2M this year and £1.4M next. If sterling weakness persists beyond this time frame, the group will be a major beneficiary. The other major issue for the group has been the decline in fabric sales in the US market and this will weigh on results this year.
At the current share price the shares are trading on a PE ratio of 15.9 but this increases considerably to 25.9 on the full year consensus forecast. After a 5% increase in the interim dividend the shares are yielding 0.9% which remains the same for the full year forecast. At the period-end the group had a net cash position of £8M compared to £7.8M at the same period last year.
Overall then this has been a difficult period for the group. Profits were down, net assets declined and the operating cash flow reduced with no free cash being generated. The reduced profits were due to a terrible hedging arrangement and declines in US fabric sales. European fabric sales were also down along with furniture sales with that division barely making any profit at all. At least decorating improved but it is still loss making. A forward PE of 25.9 and yield looks really expensive to me given the current issues. I suppose the share price is being propped up by the share buying but this is not for me at the moment.