AGA

Tough consumer conditions sees kitchen expert on the back foot

by John Marshall

Although lacklustre interim figures from Aga Rangemaster (AGA) were in line with July’s trading update, the accelerating slide in consumer confidence and growing paralysis in the housing market bode ill for the firm, and investors should avoid the stock.

The core Aga business saw sales come in flat during the first half, but this concealed a 5% drop in second quarter sales following encouraging growth of 5% in the first. A 5% drop in order intake over the summer means the outlook for the second half is not encouraging, even if this was a much stronger performance than enjoyed by many consumer orientated companies. Such a fall will have a marked impact on this highly operationally geared company, which controls the whole food chain of its products, from foundry to showroom.

Aga suffered a 10% downturn in the important Irish market, which generates 15% of its sales. Management believes this market at least may be ‘bottoming out’ but in the USA sales were down 15% in the first half and appear unlikely to recover in the short term.

While demand for Rangemaster enjoyed 5% growth, Ben Thefaut of independent broker Arden Partners believes group revenues will fall by 3% this year and 5% in 2009. Next year there will be rationalisation benefits, although they will be partly offset by £1 million of increased energy costs. This year the company benefited from forward energy contracts.

The shares have some speculative appeal as Edward Truell’s Pension Corporation, in conjunction with Duke Street, has a 25.1% stake. Truell is more interested in the pension fund. Duke Street’s interest will be limited to the iconic Aga brand. Aga’s house broker Citigroup believes it is ‘unlikely’ there will be any corporate activity ‘for about nine months’.

Following the results Citigroup warned some forecasts would ‘drift down’. Arden’s Thefaut reduced his earnings forecasts to 22p followed by 19.7p next year, which places the shares on a price/earnings ratio of 9.2 for this year, rising to 10.3 next. The valuation is therefore reasonable enough but new chairman (and former House of Fraser chief executive) John Coleman’s decision to buy a mere 5,000 shares after the figures was hardly a ringing endorsement.

Shares says: Despite the speculative possibilities the immediate outlook is discouraging. Sell