Churchill China rebuilds its margin

Churchill China’s (CHH) share price was aloft on results day in response to a 39 per cent increase in adjusted half-year earnings. The ceramics manufacturer published a positive, albeit brief, trading update midway through July. Yet the share price had lost ground in the run-up to the publication of its interim numbers, mirroring the slight decline in the value of the Aim All-Share index.

However, it’s not as if Churchill China is in lockstep with the broader index. It’s merely a reflection of the company’s relatively high levels of institutional and insider shareholdings. Judging by the lowly trading volumes over the same period it would be reasonable to assume that the shares are tightly held, a point borne out by the bid/offer spread.

Normally, this poses a problem in terms of price discovery and liquidity, but we think it merely points to a stock that is valued by its existing shareholders because of its predictability and conservative management approach. The latter point was certainly in evidence during the pandemic, when the Stoke-On-Trent potter was faced by a virtual collapse of the hospitality sector. Management promptly took steps to limit the financial impact on the company and despite a corresponding slump in receivables, it found itself in a strong position to exploit the eventual recovery in demand levels as it made a decisive move up the value chain.

Indeed, by the end of last year, annual sales were 22 per cent in advance of the pre-pandemic level, although the company – in keeping with the wider industrials sector – has had to contend with volatile energy prices and increased labour costs and constraints. The focus is on building further efficiencies after “significant margin progress in the first half”. A forward rating of 18 times forecast earnings is in line with its average through the year. Hold.

Last IC view: Hold, 1,288p, 13 Apr 2023