Wallpapers-to-fabrics designer and manufacturer Walker Greenbank (WGB:AIM) has warned of lower profits this year. That news hammers the share price, crashing 24% to 159.75p as analysts slash forecasts and price targets accordingly.

In a brief update the luxury interior furnishings company explained that UK brand sales have ‘weakened significantly’ versus management expectations.

This means that profits for the year to 31 January 2018 are likely to be around 10% lower than forecasts. Consensus had been for £13.5m pre-tax profit according to Reuters' data.

CHIASSO & LUGANO 2

SOFTENING DEMAND

CEO John Sach concedes ‘momentum in order intake has not been sustained’ since his charge (very recently) flagged an improving trend in the run-up to its important Autumn selling season.

Half way into this key trading period, and stripping out October 2016 acquisition Clarke & Clarke, which extended Walker’s reach in the US market, domestic demand for its brands has disappointed.

British consumers are clearly pulling in their horns amid economic uncertainties and the inflation-driven income squeeze.

Walker Greenbank, whose winning portfolio of brands includes Sanderson, Morris & Co, Harlequin, Zoffany, as well as more recent lines Scion and Anthology, has its own wallpaper and fabric printing factories in Loughborough and Lancaster respectively.

As Investec Securities explains: ‘With its vertically integrated model, declining UK brand sales have also had a knock-on effect on manufacturing sales and profitability.’

SHORT-TERM SETBACK

Today’s profit warning is another setback for Walker Greenbank, whose performance in the year to January 2017 was hindered by the knock-on effects of December 2015’s flood at its fabric printing factory.

Yet as Shares has previously stressed, this is a small cap with an attractive overseas growth angle. Walker Greenbank’s products are solid in 85-plus countries and weak sterling has at least made its exports more competitive.

‘Whilst the UK remains Walker Greenbank's largest market,’ representing 51% of brand sales in the first half of the financial year, ‘the board is focused on driving the company's international business where brand sales are ahead of the same period last year,’ says Walker Greenbank.

‘Licensing income continues to grow strongly and the board expects full year licensing income to be up approximately 15% on a like-for-like basis, in line with its expectations.’

Walker Greenbank - NOV 2017Analysts at Investec cut their price target from 260p to 230p and full year 2018 pre-tax profit estimate by £1.4m to £12.9m. That implies that Walker Greenbank is still on course to grow pre-tax profits from last year’s £10.4m haul.

The broker also pares its 2019 pre-tax profit forecast by £1.8m to £13.5m, though it reiterates its ‘buy’ rating on Walker Greenbank, still expected to increase the dividend in the years ahead.

Though Investec concedes this setback is disappointing, the ‘investment case remains intact in our view, with International, Licensing and Clarke & Clarke capable of delivering sustainable long-term growth for the group as the UK market starts to stabilise.’

N+1 Singer reverts back from a ‘buy’ rating to a ‘hold’ recommendation however, also downgrading its ‘fair value’ estimate from 270p to 215p.

‘Given the volatility that is emerging in UK sales, as a result of economic and political uncertainty, and lower housing activity at the premium end of the market, we feel that a more significant adjustment to forecasts is prudent for full year 2019, and downgrade by 12.5%,’ writes the broker.

‘Given international growth dynamics, increasing licensing income and mix, outer year forecasts should be more resilient.'


Issue Date: 15 Nov 2017