A rather surprising update comes today from Stoke-based ceramic specialist Portmeirion (LON:PMP) as a profit warning comes out on the back of international problems, specifically Korea. Shares are 25% down in early trade:
Portmeirion have been a bit of a success story in recent years, so this warning is surprising to say the least. Unlike many other companies that give out warnings which have lost a lot of their market value riding up to it, Portmeirion’s share price has been rather stable. Reflecting the company itself it has been strong and steady, with a marked upward trend over the past decade. Investors that started in 2008 would have seen a ten-fold increase in the value of their holdings, plus dividend. The shares were sold off along with everything else last year, but seems to have recovered.
The Stockopedia ranking is also a lofty 92 at the time of writing, and on first pass, the company has everything that many small-cap investors like to see: no net debt, healthy margins, a well-covered dividend, great cashflow. This might not be surprising in the nature of the product: a number of upmarket brands which hold international appeal, and whose products are easily transportable throughout the world. One of their strengths is their air of authenticity which is difficult to replicate.
The warning comes in a morning RNS. The first news is mixed:
We have continued to experience good sales growth in our two largest markets – the UK is up 5% and the US up 8% against the prior period last year. Having had a very strong finish to 2018, we anticipated slower demand in our export markets at the start of 2019, however actual export market sales, particularly for Korea, have been lower than we expected.
On first glance we might not assume Korea to be that significant, but the effect of this does seem to be:
As a result, total Group sales for the first four months of the year are down 10% against the comparative period last year. While the total effect on Group sales is expected to be less than that for the full year, the Board now expects profit before taxation for the full year will be significantly below market expectations.
On checking the annual report perhaps this may have been a tough comparative to follow, as South Korea indeed does make up a significant part of the business: sales were £8.2m in 2018, which was up from £6.6m in 2017. The ‘Rest of the World’ segment is even larger still, accounting for £23.2m of the £89m in sales.
There was a crumb of comfort:
We do not anticipate this leading to a change in our expectations for dividend payments in the current year.
We believe our long term strategy is the right one and are pleased with the progress we are making in other areas to protect and grow our brand portfolio.
Dividends have always been well-covered here both by profit and cashflow so this is less of a surprise.
We can see why the business has scored so high on Stockopedia, as the quality metrics are good here: a long, unbroken track record on profitability. Margins have held up well despite there being obvious competition, indicating some kind of advantage in their products.
Management appear to have a tight grip on the ship. Capital expenditures have been conservative. The last very big investment was in 2014, which has driven increased profits. The group grows via acquisitions, but these are integrated well:
This feeds nicely into the next point, as working capital is very high: there is a lot of assets here and not too many liabilities. Even taking away the intangibles (c.£13m) there is plenty of tangible asset backing to go around. Inventory clocks in at £19m, although unlike clothes these should hold their value a little better (unsure how quickly they go out of fashion).
The last year also seems to have been pleasing for the company. Overall cash flows were actually negative, but it used cash to purchase back its own shares, pay a pension deficit (which is now cleared), and repay borrowings. With these items perhaps not necessary in the next year the dividend in its maintained state (£3.7m) is in no danger even if we can assume that ‘significantly lower’ means 10%+..
With all the good points, we have to consider the bad. The share price is down 25% today, and given the current political climate this is perhaps unsurprising. The profit warning is also slightly briefer than I would have liked to see. The majority of business does not take place in Korea or the Rest of the World, so for a downturn to ‘significantly’ affect profit (which I would interpret as over 10%) this downturn must be quite acute, with perhaps only a few customers providing the bulk of the orders. The comment about the distributor would seem to square this, as well as the requirement to make new products.
Without any further breakdown in the Rest of the World territories, it may be quite puzzling to see how this could result in a 10% drop and there may be a case for this excuse masking weaknesses in other markets, particularly core ones. This ambiguity harms the share price, as well as the hinting of a H2 weighting. However, Portmeirion would have a good case for this. In the last year H1 was £33.1m off a full year of £84.8m.
However on this information it is difficult to know whether the problems are temporary, or something more fundamental, for example if a new player has gained traction in the South Korean market.
There is a lot to like about this share as already discussed. The problems in South Korea are poor and not explained that well given that this territory showed a 20%+ growth spurt in the last year. Have tastes changed so much that they need such an overhaul? More encouraging is that the core markets of the US and UK show resilience.
There is some product concentration here in ‘Portmeirion Botanic Garden’. With sales of over £30m a year for this product alone, this range dominates everything else in the group. Copycats must find this easy to produce in countries where IP rights are loose, and then there is the possibility of the line becoming out of date, or perhaps ultimately surpassed by something else. ‘Smart’ plates sound absurd at present but technology has made many things possible.
A last point is the valuation. The company was growing at a steady rate, but short of any more acquisitions there may be no growth at all this year, and the market has punished them for this. Acquisitions remain possible, although not without more borrowing, I would think. Alternatively, the group could become a takeover target themselves. It has to be said that for all the good points brought about the company the share price is not still into bargain territory. The P/E according to Google stands at 12.73, which I feel is not expensive nor cheap.
All this being said I feel the prospects are good and these problems will sort themselves out. The price isn’t quite right for me yet, and with new plans being drawn up for the Korean markets it maybe that the next update is also adverse and could provide a better entry. 4/5.