Churchill China scrambles to counter input inflation

Full-year figures for Churchill China (CCH) pleased the market, with adjusted operating profit up by 49 per cent to £9.2mn. Yet they were certainly characterised by margin constraints. The ceramics manufacturer expanded its workforce substantially as demand from the UK hospitality sector sprang back into life following the pandemic-linked hiatus, but the inevitable training lag translated into what management describes as “lower than optimal levels of experience”.

If that wasn’t enough, the company was also hit by a steep rise in input costs, with the energy component at three times the pre-pandemic level. The upshot was that gross margins remained below their long-term average, although the pressure has eased slightly in the early part of 2023.

Management pointed out that the pub industry in the UK had been particularly reticent on the order front in the aftermath of the lockdowns – understandable given the hit to on-licence trading volumes. Beyond the restoration of UK demand, part of the reason why hospitality sales increased by 40 per cent was that Churchill managed to consistently pass-through costs to its customer base. Inflationary pressures were also partially reflected in a 52 per cent increase in inventory levels, although the company also added raw materials to enable longer production runs.

Singer Capital Markets give adjusted EPS of 78.2p, rising to 85.7p in 2024.

Sales strengthened across all international markets with Europe leading the way. Sales across the channel increased by £7.7mn to £31.5mn, and overseas markets remain the growth focus. Margins and manufacturing efficiency should benefit from easing input costs and a reduction in the use of short-term contract labour, although wage inflation remains an issue. A forward rating of 16 times forecast earnings suggests that market is up to speed. Hold.

Last IC View: Hold, 1,222p, 13 Sep 2022