Exploit the overreaction to Portmeirion's issues

First-half results from Stoke-on-Trent-based Portmeirion (PMP: 285p), a leading British ceramics manufacturer and retailer, bear the scars of aggressive destocking by retailers in North America ahead of an anticipated slowdown in consumer spending.

International sales of the group’s homeware and fragrance brands – Portmeirion, Spode, Wax Lyrical, Royal Worcester, Pimpernel and Nambé – accounted for 73 per cent of group revenue of £44.1mn in the six-month trading period, of which North America is the biggest overseas market. The region accounted for £14.4mn of sales, down from £16.7mn in the first half of 2022. Retailer sales data shows that demand remains robust, which supports an improved trading performance once the destocking exercise is complete.

Moreover, other international markets have been delivering growth. For instance, sales in South Korea increased by 7 per cent to £14.3mn, buoyed by increasing online exposure and the introduction of new ranges. Underlying ceramic sales in the smaller rest of the world division were 10 per cent ahead year on year, too. Even the UK market managed to eke out a modicum of growth, benefiting from 15 per cent higher sales of home fragrance brand Wax Lyrical.

Value opportunity for medium-term gains

Reassuringly, the group's strong order book for the key Christmas trading period is ahead of last year, so the previously downgraded earnings guidance should be achieved. It points to full-year revenue falling by 10 per cent to £100mn and adjusted pre-tax profit from £8mn to £3mn. On this basis, house broker Shore Capital expects annual earnings per share (EPS) of 16.8p, down from 46.5p in 2022. Also, the 15.5p-a-share annual dividend is safe as net borrowings of £15mn are expected to halve to £7.3mn by the year-end as working capital build unwinds, implying a modest gearing ratio of 11 per cent.

Furthermore, the 5.4 per cent dividend yield and 38 per cent share price discount to net asset value highlight the value on offer ahead of an anticipated strong bounce back in earnings next year when Shore Capital predicts a doubling of pre-tax profit and earnings per share (EPS) to £6mn and 33.4p, respectively, on 5 per cent higher revenue of £105mn. The rapid improvement in profits reflects productivity gains, easing in shipping freight rates and the drop through of incremental gross profit in a positive sales cycle given the operational leverage of the business.

It’s worth noting, too, that the group is now rated on a near-40 per cent discount to rival Churchill China (CHH:1,325p) based on their respective enterprise valuation to current year cash profit multiples even though Portmeirion’s earnings should recover strongly next year.

So, having recommended holding onto your high-yielding shares for the recovery potential after management first highlighted the destocking issue (‘Portmeirion shareholders should hold their nerve after profit warning’, 20 July 2023), I maintain that advice. Hold.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.