Colefax has now released their interim results for the year ending 2018.
Revenue increased by £2.6M but operating costs grew by £1.9M to give an operating profit £656K higher. Finance expenses were broadly similar and tax charges grew by £101K which meant that the profit for the period was £1.8M, a growth of £553K year on year.
When compared to the end point of last year, total assets increased by £3.1M driven by a £2.8M growth in cash, a £265K increase in inventories and a £251K growth in receivables. Total liabilities also increased during the period due to a £1.1M growth in payables. The end result was a net tangible asset level of £28M, a growth of £2.1M over the past six months.
Before movements in working capital, cash profits increased by £759K to £3.9M. There was a cash inflow from working capital and after tax charges declined by £383K the net cash from operations was £4.8M, a growth of £3.4M year on year. The group spent £1.6M on capex to give a free cash flow of £3.2M, of which only £254K was spent on dividends to give a cash flow of £2.9M and a cash level of £9.5M at the period-end.
The main reason for the increase in profits was an improvement in trading conditions in the core US market where the Fabric division saw sales increased by 4.5% at constant currency. In contrast, trading conditions in the UK and Europe remained challenging. Sales in the UK were flat and sales in Europe increased by 1.5% at constant currency. The increase in profit was also due to an improved contribution from the decorating division.
Sales in the fabric division increased by 3.1% on a constant currency basis and excluding hedging losses, the operating profit increased by 7% to £2.9M reflecting improved trading conditions in the core US market. The improvement in the US was broadly based with sales in most territories ahead of last year, reflecting favourable market conditions. The flat sales in the UK are attributed to the very weak high end housing market which continues to be adversely affected by high rates of stamp duty as well as economic uncertainty over the outcome of the Brexit negotiations.
There is more optimism in Europe than they have seen for some years but the performance by country remains mixed. Sales in France were down 9% mainly due to a significant contract order in the prior year. In Germany sales increased by 1% at constant currency and in Italy they were up 3%. Sales in the rest of the world increased by 7% and the focus of the sales efforts in this region remain on the Middle East, China and Russia.
Sales at Kingcome sofas increased by 4% and the business made a small operating profit of £22K compared to £9K last time. At the period-end the order book was up 18% and ahead of expectations based on market conditions. The majority of sales are centred on London and the board expect future trading to be challenging due to the slowdown in the high end housing market.
Decorating sales increased by 26% and the division made a profit of £213K compared to a loss of £84K. In December 2016 the business moved to a new office and showroom in Belgravia. The new location is well suited to the needs of the business and trading has been encouraging since the move. Sales and profits in the division can vary significantly from year to year depending on the timing of contract completions. They have a number of major projects scheduled for completion in the second half and therefore anticipate a stronger than expected overall performance in the year. Although the high end housing market has been challenging, the weakness of sterling if favourable for the business and they have seen an increase in the proportion of overseas contracts.
Hedging losses arising from US dollar cover put in place prior to the Brexit vote were £595K compared to £755K last year.
Going forward, trading conditions in the UK look challenging due to a weak high end housing market caused by high rates of stamp duty and continuing uncertainty over Brexit. Trading conditions in the US are improving and there is also increased optimism in Europe, although this follows two years of sales decline and it is too early to assess the extent of any recovery. With a strong order book for the second half, the board now expect the decorating division to exceed their original expectations for the full year.
At the current share price the shares are trading on a PE ratio of 28.8 which falls to 16.8 on the full year consensus forecast. After a 4% increase in the interim dividend, the shares are yielding 0.9% which remains the same for the full year forecast. At the end of the period they had a net cash position of £9.5M compared to £8M at the same point of last year.
Overall then this has been a fairly good period for the group. Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated. The group is benefiting from a strengthening market in the US and an increasing contribution from the decorating division. This could be partly due to timings of large projects but the fall in sterling and new office seems to have helped too. The UK market is a concern, though, due to the subdued high end housing market.
The group has a strong net cash position and as such, the forward PE of 16.8 doesn’t actually look too bad. The dividend of 0.9% is nothing to get excited about but these shares are looking quite interesting in my opinion for the first time in a while.