Demand for Aga Rangemaster's (AGA) iconic and expensive cookers plunged during the financial crisis. But recent half-year results reveal sales are, at last, picking up and directors are buying again. If the momentum continues, and there's every indication it will, upside could be substantial.
- Director share buying
- Sales momentum building
- High operational gearing
- Exposed to housing market recovery
- No dividend
- Big pension deficit
"The tide is turning, the mood amongst our customers is better and there is a buzz about our new products," long-standing chief executive William McGrath crowed as he presented results recently. After a poor start to the year, orders grew 5 per cent during the second quarter, leaving first-half revenue and underlying operating profit flat.
A pre-tax loss of £2.4m included £1.4m of one-off restructuring costs and a £1.8m pension charge. But Mr McGrath is confident revenue growth will resume in the second half and thinks Aga will make a profit after pension charges for the full year. It's not just talk, either. Post results, Mr McGrath spent £10,000 on Aga shares at 108.7p and non-executive director Paul Dermody doubled his stake to over 50,000.
That looks like good timing. Orders for the iconic cooker are up 8 per cent already this year and demand for new electric versions, complete with touch-screen control panel, is growing fast. What's more, there's a huge pool of existing owners who may be tempted to switch from older, more expensive oil models.
Crucially, heavy cost-cutting since the downturn has left Aga highly operationally geared to any uptick in sales. Matthew McEachran, an analyst at N+1 Singer, estimates that beating top-line forecasts by 1 per cent would drive a 14 per cent upgrade to pre-tax profit. And that's quite feasible given the economic recovery currently under way both in the UK (63 per cent of sales) and in the US (12 per cent).
Mortgage approvals, a key indicator for cooker sales given most spending on kitchens occurs in the six months after moving house, are up sharply, driven by cheap borrowing and government schemes. UK residential property transaction were up 18.5 per cent year on year in July, according to HMRC, and in the US transactions are at their highest level in over three years.
AGA RANGEMASTER (AGA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 108p | MARKET VALUE: | £74.8m | |
| TOUCH: | 107-108p | 12-MONTH HIGH: | 115p | LOW: 51p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 200p* | NET DEBT: | 4% | |
| *Includes intangible assets of £93.3m, or 135p a share | ||||
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 259 | 4.9 | 5.5 | 1.7 |
| 2011 | 251 | 6.5 | 7.6 | 1.9 |
| 2012 | 245 | 6.3 | 7.1 | nil |
| 2013** | 248 | 7.1 | 7.8 | nil |
| 2014** | 257 | 9.2 | 10.4 | nil |
| % change | +3 | +30 | +33 | - |
Normal market size: 3,000 Matched bargain trading Beta: 0.9 **N+1 Singer forecasts, adjusted EPS and PBT figures | ||||
It's not just about the Aga, though. Sales of the company's Rangemaster cookers fell 4 per cent during the first half, but just two months into the new period and that shortfall is almost made up. New products will help in the second half, too. Elsewhere, posh tile business Fired Earth has just made its first profit in years and momentum is building at US division Aga Marvel. A launch in China is likely next year.
Even Aga's pension issue looks manageable. A new deficit recovery plan agreed last year means no cash contributions to the scheme this year or next and only £4m in the second half of 2015. N+1 Singer puts the current actuarial deficit at about £150m, but reckons a rise in gilt yields of between 100 and 150 basis points would move the scheme back to surplus. That would release a £30m guarantee to the balance sheet.
