Next time you're in the office or at a restaurant, take a look under the plate in front of you. There's a good chance you'll see the Churchill China (CHH) logo underneath. From its headquarters in the UK's pottery homeland, Stoke-on-Trent, Churchill manufactures ceramics for the hospitality industry and retail markets. The Aim-listed company delivered more than 11 per cent compound annual growth between 2009 and 2013, but 2014 is teeing up to be even stronger. That much was clear from a trading update in January which revealed that earnings in 2014 would far exceed expectations. What's more, armed with enough cash to keep investing in high-tech machinery, higher-margin products and overseas expansion, the next three years look promising, too. So, while making crockery might not seem the most exciting industry, it's certainly one that's serving up sparkling returns for shareholders.
- Booming restaurant sector
- Overseas growth
- Manufacturing efficiency gains
- Cash-rich
- High barriers to entry
- High rating
- Competition from China
The casual dining sector in the UK is booming. And as these eateries take on new sites and carry out refurbishment programmes, Churchill is winning new business. In the first half of 2014, for instance, the group did major business with Wetherspoons. What's more, the upsurge in casual dining comes precisely as Churchill is steering away from the retail market to focus on its more profitable hospitality business, which accounted for 81 per cent of first-half sales. The margin difference here is significant: 15.9 per cent in hospitality versus 6.0 per cent in retail. Moreover, finance director David Taylor says barriers to entry in hospitality are surprisingly high as buyers are typically more concerned with design and performance - such as weathering well after sustained industrial dishwasher use - rather than price. Surface decoration is reported to be growing increasingly popular, too, allowing Churchill to leverage its high-tech manufacturing capabilities. That's not to say there's no competition: product from China is certainly on the up. But Churchill's stuff is superior to Chinese porcelain and an expected 60 per cent repeat order rate for 2015 suggests customers would agree.
| CHURCHILL CHINA (CHH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 580p | MARKET VALUE: | £64m | |
| TOUCH: | 575-585p | 12-MONTH HIGH: | 620p | LOW: 430p |
| FORWARD DIVIDEND YIELD: | 2.9% | FORWARD PE RATIO: | 18 | |
| NET ASSET VALUE: | 258p | NET CASH: | £7m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 42.3 | 2.4 | 17.5 | 14.0 |
| 2012 | 41.4 | 2.7 | 19.6 | 14.2 |
| 2013 | 43.2 | 3.4 | 25.2 | 14.6 |
| 2014 | 44.7 | 4.1 | 29.4 | 15.5 |
| 2015 | 45.7 | 4.5 | 32.3 | 17.0 |
| % change | +2 | +10 | +10 | +10 |
Normal market size:200 Market makers: 4 Beta:0.17 *Sanlam Securities forecasts | ||||
But if Churchill has a 20 per cent slice of the UK hospitality market, it's a minnow outside these shores - although exports to Europe were up by a fifth in the first half. Developing the export business is, therefore, the next stage in its growth plans, says Mr Taylor, notably eastern Europe, Mexico, the Middle East and South and Central America.
Admittedly, overseas growth comes at a cost. Luckily, Churchill has a rich balance sheet, thanks to strong cash generation, so higher capital spending shouldn't be a problem. Moreover, profitability continues to improve, thanks partly to the shift towards more complex higher-margin products, but also Churchill's continuing investment in its manufacturing facilities, which is resulting in improved energy efficiency, labour costs, yield, flexibility and tighter technical control. This year, analysts reckon the profit margin might increase from 9.4 per cent to 10 per cent.
