The latest EY-Parthenon quarterly analysis of UK profit warnings paints a bleak picture. No fewer than 66 UK-listed companies issued profit warnings between April and June 2023, the seventh consecutive quarter of increased profit warnings year on year – the longest sequence since 2008-09.
In the past 12 months, nearly 18 per cent of UK-listed companies have issued a profit warning as recession-like conditions impacted almost every part of the UK economy and new shocks and headwinds hit earnings. At the start of 2023, contract delays and cancellations were the dominant themes as businesses facing uncertainty and cost pressures reassessed their spending plans. The story continued into the second quarter, with contract and cost-cutting stress spreading from technology companies into the industrial support sector, which issued the highest number of profit warnings.
The impact of tighter credit conditions triggered one in five profit warnings in the latest quarter, the highest proportion for 15 years. Companies are feeling the impact on their own balance sheets, on their customers, and on demand in the wider economy, especially in sectors where credit availability has been a key driver of activity, such as the housing market.
Although EY-Parthenon notes that we may have reached the peak of the earnings downgrades, this is the point when insolvencies and restructurings start to increase too, highlighting the importance of focusing on companies with operational and balance sheet strength to support recovery.
Hairline cracks appear in Portmeirion’s sales
Stoke-on-Trent-based Portmeirion (PMP:285p), a leading British ceramics manufacturer and retailer, has been hit by retailer destocking in North America.
The group’s established homeware and fragrance brands – Portmeirion, Spode, Wax Lyrical, Royal Worcester, Pimpernel and Nambé – are sold to consumers across more than 80 countries with international sales accounting for 75 per cent of group revenue. North America is the biggest overseas market, generating 40 per cent of group sales in 2022.
Although customer demand remains robust for Portmeirion’s products, as supported by North American sales data covering 60 per cent of that market – and the order book for the all-important Christmas trading period is ahead of last year – sales in the US and Canada slumped 14 per cent in the first half. The directors believe the dip in trading will be temporary as underlying end-user demand is expected to support restocking by retail customers, mainly national department stores, in due course.
It’s worth noting, too, that other markets are trading ahead of last year. Ceramic sales in the rest of the world markets are 10 per cent up year on year, and sales of home fragrance brand Wax Lyrical have increased 15 per cent. New product launches have been well received, and the US market forward order book for the group’s highly popular Spode Christmas ranges is up in double digits.
A cautious approach leads to downgrades
However, the board has taken the view that it’s prudent to assume retailer caution will continue through the second half, prompting the directors to rein in their earnings guidance.
The news prompted house broker Shore Capital to reduce its current year revenue estimate by 11 per cent to £100mn, and rein back 2024 sales forecasts by a similar amount to £105mn. The reduction in profits is more pronounced given the operational leverage of the business and has been accentuated by a near-doubling of the forecast finance charge (from £0.8mn to £1.5mn) to reflect the sharp rise in interest rates this year and higher than previously projected year-end net borrowings of £7.3mn (from £4.2mn). That said, balance sheet gearing is still comfortable, equating to 11 per cent of net asset value of £66.7mn.
As a result, Shore Capital now expects full-year cash profit to fall from £13.2mn in 2022 to £9.2mn (downgrade from £14.7mn previously forecast), the effect of which is to drive down pre-tax profit of £8mn in 2022 to £3mn, or two-thirds below previous forecasts. On this basis, expect a similar reduction in earnings per share (EPS) from 46.5p to 16.8p, way below Shore Capital’s previous 51.4p estimate.
2024 earnings recovery forecast
The broking house does expect a strong profit recovery in 2024 as the projected £3mn rise in cash profit on 5 per cent higher revenue of £105mn feeds through to a doubling of both pre-tax profit and EPS to £6mn and 33.4p, respectively. Although analysts are maintaining their dividend per share forecasts at 17.5p (2023) and 21p (2024), it’s perhaps prudent to assume a held payout per share of 15.5p. The implication being that the shares are rated on forward price/earnings (PE) ratios of 17 (2023) and 8.5 (2024) and are underpinned by an historic dividend yield of 5.4 per cent.
The profit warning led to a 28 per cent share price reversal and makes my buy call, at 457p, three months ago ill-timed. It also means that Portmeirion’s enterprise valuation of £47mn equates to only five times current-year downgraded cash profit estimates and four times 2024 forecasts, a massive discount to rival Churchill China (CHH:1,385p), which is priced on multiples of 10 times (2023) and 9.2 times (2024). Portmeirion's shares also trade on a deep 41 per cent discount to book value of 476p.
So, given the huge ratings discount to sector peers, high dividend yield, and low forward earnings multiples which factor in a 2024 profit recovery, I would not be selling your shares at this depressed level. Hold.
