Fans of interior design will be familiar with the English country house style, developed by Lady Colefax and John Fowler during the 1940s. Their Colefax and Fowler brand of fabric and wallpaper is now synonymous with luxury, yet the rating implied by cash-rich Colefax's (CFX) share price is more shabby than chic. However, with the US recovery underway and the worst over here, that could be about to change.
- Ongoing recovery in the US
- UK over the worst
- Rapid earnings growth forecast
- Substantial cash pile
- Weak dollar
- Wide bid/offer spread
Already, full-year results published in July were better than expected. US sales jumped 8 per cent, driven by a big improvement both in the housing market and the general economy. That offset weakness in both the UK and Europe, and despite a flat top line, pre-tax profit grew 13 per cent to £3.55m. With over half its wares ending up in American homes, what happens there is crucial. Political shortcomings aside, the signs are promising.
Colefax grew US sales by 6 per cent at constant currency in the four months to 31 August, and although recent data has been mixed, the longer-term trend is certainly up. Indeed, the IMF expects the American economy to grow by 2.6 per cent in 2014, and with US sales still 21 per cent below their peak in 2008, Colefax chiefs believe there is "considerable scope for further recovery". We do, too.
Of course, converting its substantial US profits from dollars back into pounds brings currency risk and the dollar has recently weakened. But this should reverse if, as is widely anticipated, the Federal Reserve begins tapering early next year. Not only will that strengthen the dollar, but it would also imply that the US economy is doing well - a double-whammy for Colefax.
Already impressive cash generation would improve, too. Last year's free cash flow of £3.4m was a six-year high, and Peel Hunt has pencilled in net cash of £9.5m for the April 2014 year-end. That's over a quarter of the current market capitalisation and worth 77p per share. Two years later it could be over £14m, says the broker. Sensibly, management have regularly returned surplus cash to shareholders via share buybacks and a £4m tender offer last year. With acquisitions unlikely, expect Colefax to exercise its authority to buy back another 3.4m shares over the next four years.
COLEFAX (CFX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 290p | MARKET VALUE: | £35.7m | |
| TOUCH: | 285-295p | 12-MONTH HIGH: | 293p | LOW: 223p |
| FORWARD DIVIDEND YIELD: | 1.7% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 197p | NET CASH: | £7.63m | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 77.7 | 6.52 | 33.0 | 3.85 |
| 2012 | 70.4 | 3.15 | 15.8 | 3.85 |
| 2013 | 70.6 | 3.55 | 18.2 | 4.00 |
| 2014* | 74.1 | 4.50 | 24.9 | 4.20 |
| 2015* | 75.4 | 5.00 | 27.7 | 4.80 |
| % change | +2 | +11 | +11 | +14 |
Normal market size: 500 Market makers: 2 Beta: 0.0 *Peel Hunt estimates, adjusted PBT and EPS figures | ||||
But let's not forget where it all began. Colefax has decorated some of Britain's finest stately homes as well as the Prime Minister's country retreat Chequers, the Bank of England and Buckingham Palace. True, UK revenue has fallen by over a quarter since 2008 to just £17.9m, but a 9 per cent decline last year slowed to just 2 per cent in the four months to August, suggesting the tide may be turning. Clearly, the London housing boom will help and prices are rising fast elsewhere, too.
Encouragingly, the IMF not only forecasts UK economic growth of 1.9 per cent next year, but also expects a return to growth in Europe where, surprisingly, Colefax's sales have held up far better. Colefax is playing down prospects here, but with four-month sales up 4 per cent, another positive surprise looks possible. Even the decorating business - responsible for 10 per cent of turnover - should grow profits as it fills orders delayed last year by building work.
