Walker Greenbank (LON:WGB) Warns on Profit: Shares Down 22.5%

By | 24th July 2018

A surprising update today, as luxury furnishings company Walker Greenbank (LON:WGB) put out an RNS very close to the market close which warned investors on profit for the current year. The share price has been falling steadily over the past year, but even still the news was punished heavily with the price sliding to a multi-year low of 80p. Coming so soon after the end of June where the AGM statement declared a more upbeat picture, it’s fair to say that there will be some very disappointed holders out there, and there may be more pain for the share price in the morning when the market re-opens:

So what was the reason behind this profit warning? The trading update is relatively short and gets to the point:

Since the AGM, the Company has gained new information on the potential profit contribution from this large licensing agreement and, as a result, the Board has materially revised down its expectations for licensing income in the current year.

There is no further detail as to exactly why this large agreement is not bearing as much fruit. But still, there was another bombshell to come:

The improving trend in trading noted at the AGM has since deteriorated with July being particularly disappointing and orders received to date are tracking below Company expectations. As a result, the Board now looks towards its key autumn trading period with renewed caution.

This type of trend perhaps could be put down to the weather if we are being generous. It does seem a little credible that the market for any type of discretionary spending might take a hit in extremely hot weather conditions, with people choosing to spend more time outside instead of on their computers.

To be fair to the company, they are not blaming the weather, or other events such as Brexit. And there is specific guidance as to what the effects will be:

As a result of the above it is now apparent that adjusted profit before tax* for the full year will fall materially short of the Board’s expectations. The Board now anticipates that adjusted profit before tax for the year ending 31 January 2019 is likely to be in the range of £9.5 million – £10.0 million.

On the face of it, this makes the valuation of the company extremely cheap. The market cap is now £58m at a 80p share price, so this translates to a low, sub-6 price/earnings ratio. The obvious trouble is whether another poor month of trading in August would lead to another very similar statement being put out, and the earnings downgraded again. For a business of this size it does bring into question whether trends can be valid. Business can be lumpy, faddy and hard to predict.

Is there a case to invest here?

My own initial instincts would be that potentially this could be a good one. The business is consistently profitable, is growing its revenues at premium margins and pays out a very decent dividend which is well covered. One worry would be that in the short-term there could be further poor sentiment towards the share. There were some hefty trades in the market today before the RNS came out, which indicates that someone knew this was coming in advance.

Despite this, the business doesn’t seem in any immediate danger. The licensing income for last year was £3.1m, and this is said to increase further for 2019 inclusive of today’s setback. That provides a nice cushion. I don’t think the quality of the business is in doubt, and previous results have shown there has been nothing too rash. There is modest debt and also a modest pension deficit of £7.3m, but these factors on their own are not large enough to trouble the company in the short-term.

The question does depend on your view of the general market and whether conditions will become more favourable or not. The markets are extremely bearish on housing at present, and that malaise does seem to have spread over to many of the related industries such as building supplies and home furnishings. Many of these type of companies trade on low valuations because of the uncertainty ahead.

Walker Greenbank could argue to be a bit different from that. Many of its brands are high-end, the type of stuff that most may not have heard of. But then, the type of customer it serves is likely to be cash rich and immune to a market downturn. A more pertinent question would be whether competitors could muscle in. I don’t know too much about whether there is an inherent advantage in any of Walker Greenbank’s products, but I do know that many larger companies such as Wayfair are also targeting this luxury market segment, and are throwing cash at marketing campaigns.

It’s certainly been a run of bad luck for the company. The share price stands at under half of what it was recently, and comes with an uncertain outlook. That said, given the low valuations I see this as lower risk than most, even if there is further choppiness in the share price and am inclined to rate this at 4/5. Currently, Walker Greenbank qualifies for 6 screens in Stockopedia (only 9 companies can better this), although this may change when the lower profits are digested.

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