Churchill China holds finances steady

Prior to the onset of Covid-19, market analysis from Grand View Research put the annualised growth rate of the global tableware market at 6 per cent through to 2025, but we suspect that figure could now be subject to revision.

Nonetheless, the structural drivers of the industry remain in place: changing demographics; increased levels of disposable income; and a switch in favour of discretionary spending. All these factors support the wider hospitality industry and should apply even after we have learnt to live with the virus.

Churchill China (CHH) had been outstripping the industry growth rate in the years prior to the outbreak, but has subsequently been engaged in a damage limitation exercise. A sizeable reduction in revenues and lower gross margins were to be expected with the wider hospitality industry put on ice through much of 2020. The squeeze on hotel and restaurant budgets is also reflected in the fall in receivables, though management confirmed that order levels and sales activity are recovering across the group’s markets.

Management was quick to grasp the nettle. Decisive action was taken to limit the financial impact on the group, including the curtailment of share based payments. Lower working capital requirements meant that Churchill exited 2020 in much the same shape as it entered the year. However, management remains circumspect, so it will review its dividend policy once a clearer pattern of trading has emerged during the first half of 2021.

From an operational perspective, the group continued to serve its customer base where applicable, and has also invested in its product lines and distribution channels. It was inevitable that margins would come under pressure through the negative effects of operational gearing when manufacturing output trailed away, but it is worth noting that ‘added value’ products have been building as a proportion of overall sales, which could bolster profitability going forward.

Investec forecasts adjusted EPS of 36.8p in 2021, rising to 73.8p the following year.

“Resilient” is an overworked term, but it is hard to think of any more appropriate description to apply to the Stoke-On-Trent potter. Early action on the cash front means that the unavoidable slump in demand may eventually be viewed as a commercial hiatus, rather than any threat to the long-term stability of the business. It is difficult to assess how rapidly commercial activity in the hospitality sector will recover, but on top of the successful contingency planning for Brexit, management has positioned the group to take full advantage of any near-term bounce. Hold.

Last IC view: Buy, 1,050p, 20 Aug 2020