We believe the recent trading weakness in South Korea reported by Portmeirion (PMP), owner of the eponymous pottery brand as well as Spode, Royal Worcester and Pimpernel, will prove temporary. What's more, these difficulties have overshadowed the growth potential from a major increase in UK production capacity and a significant acquisition. The group should also benefit from the strengthening of the dollar as the US is its largest market accounting for almost a third of turnover. And despite the slowdown in Asia, strong trading across the pond and in the domestic market (26 per cent of sales) have been contributing to a steady stream of EPS forecast upgrades (see graph).
- Depressed valuation
- New kiln
- Dollar exposure
- Acquisition boost
- Recent director selling
- Soft trading in Asia
The bad news first: in May, the company acknowledged that trading throughout parts of Asia, including its third-largest individual market, South Korea, which accounts for nearly a fifth of turnover, had continued to disappoint. While the weakness has persisted for longer than originally expected, management thinks the downturn will be relatively short lived. That's because while macroeconomic weakness was a factor in the 18 per cent slide in South Korean sales in 2015, the key cause was the entry of a rival into the market with an aggressive discount strategy. The competitor has since withdrawn.
It is a testament to the strength of Portmeirion's mature markets that while total sales in the four months to the end of April were 2 per cent lower, the company says pre-tax profit remains in line with market expectations.
And there's plenty more to be excited about. EPS forecasts received a substantial boost in early May on news that the company would be utilising the cash on its balance sheet along with some of its undrawn debt facilities by buy unlisted Lighthouse Holdings for £17.5m. Panmure estimates the price equates to about 10 times earnings, which looks attractive, and there should be great cross-selling opportunities from Lighthouse's Wax Lyrical scented candles business.
In coming years, Portmeirion should also reap benefits from its recent £1.5m investment in a new kiln, which is the first major investment in its Stoke on Trent factory since 2002 and should ultimately lift UK production capacity by over 50 per cent. The UK factory has already ramped up production by 20,000 items a week and, if demand permits, believes it will be able to add a further 80,000 items a week as it addresses anticipated production bottlenecks.
It is somewhat discouraging that finance director Brett Phillips and his wife recently sold 30,000 shares, but the couple still owns more than 61,000 shares and some comfort can be taken from the fact that the buyer of 5,000 of the shares they sold was non-executive chairman Richard Steele.
| PORTMEIRION (PMP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 993p | MARKET VALUE: | £107m | |
| TOUCH: | 985-1,000p | 12-MONTH HIGH: | 1,268p | LOW: 883p |
| FORWARD DIVIDEND YIELD: | 3.7% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 338p | NET CASH: | £11.1m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p)* |
|---|---|---|---|---|
| 2013 | 58.3 | 7.0 | 53.3 | 24.0 |
| 2014 | 61.4 | 7.6 | 57.6 | 26.5 |
| 2015 | 68.7 | 8.6 | 65.5 | 29.8 |
| 2016* | 80.6 | 9.6 | 72.9 | 33.2 |
| 2017* | 89.4 | 10.7 | 81.0 | 36.8 |
| % change | +11 | +11 | +11 | +11 |
Normal market size: 300 Market makers: 5 Beta: 0.19 *Panmure Gordon forecasts, adjusted PTP, EPS and DPS figures | ||||
