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In July 2009, the IC reviewed Colefax’s 2008-09 results and upgraded the shares from fairly priced to contrarian buy. The basis of this decision was that the best time to acquire an interest in a company is when it's on its uppers, but also has the protection of a strong balance sheet.
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And so it has proved. The results in the table below look alarming, but are certainly better than those expected last summer. True, the US (accounting for around half of sales) was something of a disaster zone as turnover fell by nearly a third on a constant currency basis. Sales were also significantly lower in both the UK and Europe: the only bright spots were interior decorating and the benefit of £2m of cost savings secured in 2007-08.
But Colefax is probably through the worst and company broker Peel Hunt certainly thinks so. It has fully reversed its downgrade in July and now expects 12 months' profits to jump from breakeven to £2m. Another bright spot is found in the balance sheet where lower working capital needs have doubled cash balances during a recession. In addition Colefax can also draw on a £6.5m UK overdraft facility, plus a $1.5m revolving credit. The company is not known for much M&A, but one of seven 'growth opportunities' set out in its presentation is potential acquisitions coupled with market share gains as rivals wilt. The company is pushing product diversification within fabric brands. Fabric continues to dominate by accounting for 83 per cent of the latest interim sales.
COLEFAX (CFX) |
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|---|---|---|---|---|
| ORD PRICE: | 117.5p | MARKET VALUE: | £17.4m | |
| TOUCH: | 133-122p | 12-MONTH HIGH: | 117.5p | LOW: 81.5p |
| DIVIDEND YIELD: | 2.5% | PE RATIO: | 18 | |
| NET ASSET VALUE: | 148p | CASH: | £4.49m | |
| Half-year to 31 Oct |
Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 36.7 | 2.48 | 11.6 | 1.55 |
| 2009 | 31.0 | 1.14 | 5.4 | 1.55 |
| % change | -16 | -54 | -53 | – |
Ex-div: 3 March Payment: 1 April Aim: Home furnishings |
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Interim profits suggest that Colefax may meet its broker's forecast. We continue to rate the shares a buy.
Last IC view: Buy, 103.5p, 21 July 2009
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
