Five stocks to watch in June
Churchill China may have a new chief executive, but the venerable tableware manufacturer is growing as reliably as ever. In full-year results to the year ending December 2014, Churchill China increased revenue by 3% over the preceding year. Adjusted profit rose 20%, and its cash flow allowed the firm's cash balance to increase despite investment in its factory.
It's the kind of result investors have become accustomed to for more than a decade as, along with Portmeirion, Churchill China has emerged as one of Staffordshire's surviving potteries. Indeed, it's prospering. Not so long ago businesses in the Staffordshire Potteries were fighting a losing battle against cheap imported tableware from the Far East, exacerbated by the trend for people to eat out.
Churchill China's strategy turned it into a beneficiary of the second factor. It mainly supplies the hospitality sector – restaurants, pubs and hotels – these days, having invested heavily in modernising its factory in Stoke-on-Trent so it can churn out high-quality fine china for commercial kitchens.
In 2014, Churchill continued to focus on its most profitable business, investing in UK manufacturing efficiency and capacity (it installed a new kiln) and growing exports. Exports accounted for 16% of revenue compared to 14% in the previous year, helped in part by European anti-dumping duty that penalises Far Eastern importers. Revenues from the hospitality division increased to 81% of the total, as Churchill focused manufacturing capacity where it was most profitable.
A share price of 560p values the enterprise at £53 million, or 15 times earnings. The earnings yield is 7%, which is fair enough. It's the price of stability.
In its recently published annual report for the year to December 2014, shipping services business Clarkson reported a 20% increase in revenue, a 28% increase in profit, and a return on capital of 16%. The company also performed well in cash terms.
The results, which are adjusted to ignore exceptional costs, are particularly impressive given oversupply of many of the vessels it arranges charters for. Abundant cargo vessels, container ships and tankers lead to low charter rates, which should mean less commission for the broker. Yet since 2008, Clarkson has demonstrated it can steam on profitably.
Despite current market conditions, it's confident of 'enhanced returns'. Three quarters of revenue and 85% % of profit came from shipbroking in 2014, but 0 in recent years the company has been building up its support division, which provides port services for ships.
The acquisition of Platou, a Norwegian shipbroker and investment bank, will bolster some aspects of the brokerage business and also Clarkson's relatively small finance businesses, which made a loss in 2014.
Research, a fourth division, is more important than its 4% contribution to revenue in 2014 implies. For a start, the database, shipping register and periodical publisher earned 9% of total profit. It's also a source of intelligence for the rest of the business.
There's not much sign of investor concern in Clarkson's valuation. A share price of £22.70 values the enterprise at £590 million, about 21 times adjusted earnings. The earnings yield is 5%.
In full-year results for the year to 31 December 2014, Computacenter reported a 1% rise in revenue and a 12% rise in adjusted profit. Return on capital was 8%. More than two-thirds of revenue came from sales of computers, operating systems and other software, which are lumpy and not very profitable, but the company is following the industry by shifting to supplying services.
Computacenter wants to be the trusted friend of the chief information officer, helping them on their 'transformational journey'. The destination is systems that incorporate mobile phones, the so called 'internet of things' encompassing web-enabled interconnected appliances and devices, cloud computing, and engagement systems that marry these technologies together with analytics and social media.
Internally, Computacenter has rolled out an automated service desk providing IT support, and a mobile device management platform, which it plans to offer customers in 2015.
The company is trying to sell customers consultancy and maintenance contracts for email systems, technical support and other IT services, with mixed success. In its biggest market, the UK, Computacenter is winning service contracts, recently with Royal Mail and the Post Office.
But its French business, which earns 38% of revenue, is outdated, uncompetitive and loss-making. It's restructuring, but this has disrupted the company, exacerbating the effects of a failed IT implementation in 2013, which has prevented the division from properly managing its accounts and resulted in ballooning receivables (debts owed to the company). If it can turn this situation around, performance would improve considerably.
Optimism may explain why the shares are not quite in bargain territory. A share price of 700p values the enterprise at £1.2 billion or about 15 times adjusted earnings. The earnings yield is 7%.
In full-year results to December 2014, potter Portmeirion revealed it had earned 5% more revenue and 6% more adjusted profit than the previous year. The company has no borrowings, and its cash balance was stable. Sales grew in the UK, US and South Korea, but not in Europe, where imports of products sourced in the Far East attract anti-dumping duty.
Portmeirion manufactures earthenware in Stoke-on-Trent, and markets and distributes imported bone china, porcelain, glassware and accessories. It manufactures almost 50% by value of what it sells, a proportion that has increased from over 40% a few years ago. Until recently, Portmeirion earned the majority of its revenue in the UK, but now the US is the biggest customer, with South Korea rivalling the UK. Sales in India rose 80% to 4% of total revenue in 2014.
The popularity Portmeirion's designs is enduring, and so is its stable culture. The company has skilled a workforce in Stoke-on-Trent and the chief executive has been in place since the beginning of the millennium.
The finance director was appointed in 1988. Both men have steered the company effectively through challenging times, and in 27 years as a listed company Portmeirion has never cut or withheld the dividend.
Its innate conservatism does not obstruct progress, though. To keep pace with the growing demand for earthenware, Portmeirion is investing £1.5 million in a new kiln and equipment to increase manufacturing capacity 50%. A share price of 940p values the enterprise at £105 million, or about 16 times adjusted profit. The earnings yield is 6%.
Cash flow aside, wallpaper and fabric designer and manufacturer Walker Greenbank's full-year results confirm its multi-decade transformation from serial loss-maker into something of a stalwart.
In full-year results to January 2015, the company reported revenue 6% higher than the previous year, adjusted profit up 12%, and a return on capital of 15%. However, pension deficit repayments, and more money tied up in stock and owed by customers, meant that after investment in new digital printers and a new warehouse, the company earned hardly any hard cash.
Since the 1990s, Walker Greenbank has focused on home interiors. The company acquired heritage brand Arthur Sanderson & Sons along with Morris & Co in 2003, and has more recently launched new collections targeting younger and overseas customers within its mid-market and more contemporary Harlequin brand. Harlequin is Walker Greenbank's biggest revenue spinner.
The brands, the rationalisation of its UK factories into two sites - one for wallpaper and one for fabrics – and the integration of manufacturing and design so the company remains 'at the absolute forefront of what is possible', have delivered a decade of growth and stability without excessive borrowing.
Management deserves credit. Chief executive John Sach joined the company in 1994 and has run it since 2004. The strategy is to continue investing in design, manufacturing and distribution, while pursuing overseas growth, particularly in the US where Walker Greenbank has extended its US showroom.
The company's valuation probably reflects its more dependable status. A share price of 200p values the enterprise at £136 million, about 20 times adjusted profit. The earnings yield is 5%.
This feature was written for our sister publication Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
In a financial context, churn refers to the frequency at which a share portfolio or investment fund sells the securities in the portfolio to realise cash in order to buy more securities. It’s also a way unethical brokerage firms “churn” clients’ accounts by trading securities very actively in order to increase brokerage commissions rather than customer profits, as brokers’ income is directly related to the volume of trading they undertake on customers’ behalf.
All limited liability companies registered in the UK are compelled by law to compile a report once a year on the company’s accounts and directors’ statements must be issued to shareholders and filed at Companies House. A report details a company’s activities throughout the preceding year and its contents will include chairman’s statement, auditor’s report and detailed financial information such as cash flow and balance sheet statements.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.