Sanderson Design impresses despite UK challenges

Sanderson Design Group (SDG) revealed a 3 per cent fall in constant currency revenue in the six months through to 31 July. Brand product revenue was constrained by tightening markets in the UK, which account for nearly half of the group total. There was better news from across the pond, where US sales improved by 10.3 per cent, a positive sign given that it represents the main growth engine going forward.

Sanderson designs, manufactures, and markets a range of wallpapers, fabrics, and paints. It also generates licensing income from the use of its designs on a wide range of homeware products. Although it’s generally held that the homeware market tends to be less cyclical than some other industries dependent on discretionary spending, current market conditions are certainly challenging. Analysis from First Insight, a provider of predictive analytics, points to a degree of price elasticity where homewares are concerned, but one suspects that depressed volumes within the UK housing market present the main stumbling block as things stand.

Within that context, Sanderson’s interim showing provides cause for encouragement. The group bumped up its gross margin by 210 basis points to 67.9 per cent, while net earnings saw a double-digit increase thanks to a surge in net finance income and despite distribution and selling expenses constituting a higher proportion of group revenue than they did in July 2022. Management is obviously keen on boosting unit profitability further, having streamlined the UK support function, shaving an estimated £600,000 from the annual cost base in the process.

Revenue from third-party manufacturing was down by a fifth, but it was set against a prior year comparator that benefited from post-pandemic restocking. By contrast, the licensing business performed admirably, with related revenue up by 81.6 per cent. This part of the business is set fair given healthy renewal rates and new licensing deals signed with Next (NXT) and Sainsbury's (SBRY) during the first quarter of 2023. It’s worth noting that this corner of the company has an outsize impact on the group gross margin; ergo increased scale here should bolster profitability in the future.

A solid outcome in the face of rising input costs. Sanderson trades at just under seven times FactSet consensus earnings on an ex-cash basis (representing 16.8p a share), or on an enterprise/Ebitda multiple of 5.1 times – well below the five-year average. The valuation is undemanding compared with peers, so we upgrade to buy, existing market challenges notwithstanding. Buy.  

Last IC View: Hold, 141p, 26 Apr 2023