Stock to Watch: Walker Greenbank

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

A robust trading update for the year to end-January 2012 from AIM-listed designer and manufacturer of luxury furnishings, fabrics and wallpaper Walker Greenbank (WGB) underlines its strength in export markets and contrasts with a 25 January warning from AIM-listed Colefax Group (CFX), which cited weaker than expected sales.

On 2 February, Walker Greenbank said it has continued to trade well since announcing interims last October, such that "pre-tax profits will be slightly ahead of analyst forecasts, reflecting an encouraging performance in the UK and strong growth in international markets, particularly the Far East, Eastern Europe and Middle East."

Within total sales expected up 7% to £74 million, the UK (67% of prior year total revenue) is up 5% and the US is up 4%, although Western Europe is not mentioned. "Emerging international markets" are highlighted, with Far East sales up 20%, Eastern Europe up 22% and the Middle East up 94%.

While this is long-term encouraging, rest-of-world sales were only 7% of the 2010/11 year total.

The crux, why this share remains interesting at 54p currently, is that the stockmarket fears discretionary spending on luxury items is exposed to a fall, should recession drag on, hence Walker Greenbank trades on a price-earnings (P/E) multiple of little more than seven times forecasts. The shares plummeted from a 40p range to as low as 7p with the 2008/09 bear market.

Yet after pre-tax profit halved from about £3 million then, there has been strong progress. Before this update the market consensus was for £5.5 million this latest financial year, edging up to about £5.8 million. Possibly this results from the company's ability to target affluent people largely unaffected by economic downturn, also those who still want to find money to treat themselves with quality home items (cutting spend on holidays for example), and people who want to add some luxuries instead of move house.

Walker Greenbank's progress certainly shows it is possible to defy a common assumption that furnishings spend correlates with the housing market, i.e. people moving.

It is also interesting to note a 23 January announcement about a major new showroom in Shenzhen, a southern Chinese city with over 14 million people - via its distribution partner, which says: "Our customers are highly attracted to Walker Greenbank's luxury products because of their English heritage and that the wallpapers, and many of the fabrics, are manufactured in the UK."

You only need visit Harrods nowadays to see how the Chinese are key spenders on luxury items. Like with the Japanese 20 to 30 years ago, this can obviously change with economic fortunes, but it looks an astute move.

Unless the eurozone breaks up with dire consequences, it is therefore possible Walker Greenbank will continue to make progress that also beats the cautious broker forecasts for the 2012/13 year onwards.

It is hard to be certain but at least there is scope for upgrades, especially on a longer-term view. With management showing both manufacturing and marketing skill, recessionary times ought to be useful for accumulating these shares.

I first drew attention to Walker Greenbank two years ago at 22p after the company announced that sales were gaining momentum and results would be ahead of expectations - implying a P/E multiple falling below six times. I thought then that a possible driver was lower mortgage interest rates - recalling the "you've never had it so good" remark by Lord Young (considered insensitive and which lost him his government advisory job).

But from 55p the shares traded overall sideways through 2011, falling to 43p with last autumn's market malaise. An end-July net asset value of 39p a share probably helped to limit downside.

With the dividend yield only a tad over 2%, if covered about seven times by earnings, this share essentially involves judging the earnings trend.

Colefax, also in branded furnishing fabrics and wallpapers, has said the main reason for its interim pre-tax profit being down from about £3 million to £2 million, like-for-like, has been a weak performance from its decorating division - however just recently "trading conditions in the UK and Europe have deteriorated and we expect trading to become more difficult".

A caution was also sounded for the US, where recovery is projected slower. Management warned that "as a result of current trading conditions... this year's profit (to end-April) will be significantly below current market expectations". It would be foolish to brush this aside even if Walker Greenbank's management is doing a better job in the circumstances.

Last October, Walker Greenbank's chief executive said: "We believe we are winning market share because of the comprehensive range of printing technologies we offer; our focus on quality; customer service; and our continued investment in our factories." In the recent environment at least, this has enabled Walker Greenbank to grow while others have been hit.

Osborne & Little, which de-listed a decade ago, has seen profit wiped out and its dividend cancelled - according to results reported just before Christmas.

That Walker Greenbank can show itself resilient in such a context is encouraging for the long term. Near term however it is important to keep an eye on consumer spending, for if it deteriorates then its shares will have another volatile year - yet worth buying any dips.

Assuming a P/E nearer 10 times and cautious forecasts before the 2 February update, this share ought to be at least 80p - and if the market does not recognise its intrinsic value then the progressive globalisation of the brands might attract an acquirer.

Although £6.0 million of £22.6 million net assets comprise intangibles, brand value is indeed a vital aspect of intrinsic value here. The ratio of current assets to current liabilities was a healthy two times at end-July 2011 and borrowings were just over £7 million - so the company is well able to withstand a downturn.

For more information see walkergreenbank.com and for more Stocks to Watch, visit Edmond's archive.