Churchill China battles hospitality slump

Churchill China (CHH) benefited from a double-digit hike in its share price following the release of full-year figures that included a moderately upbeat assessment of forward prospects. The manufacturer of ceramics destined for the commercial hospitality market had foreshadowed some softening in end markets in a January trading update, noting that it expected “demand to remain weak for at least the first half of the year”.

The group has overcome its staffing issues, boosting manufacturing yields in the process, but cost increases, including the recent increase in the national living wage, will continue to weigh on operating margins in the wider hospitality industry for the foreseeable future.

The group anticipates higher volumes in the latter half of the year, but prospects on that score are dependent on improved discretionary spending. Unfortunately, prospects for a second-quarter cut in the base rate are receding, so the knock-on benefits for the hospitality industry may well be delayed. Hotels, restaurants and pubs have been struggling under the weight of increased costs linked to labour, energy and food. Indeed, the number of restaurants closing across the UK hit a new quarterly high of 514 at the end of 2023, according to data obtained under the Freedom of Information Act by accountancy firm Price Bailey.

Churchill notes that market weakness was noticeable in the UK and Rest of the World segments, although domestic volumes held firm overall. However, the company boosted its market share in Europe – now its largest sales generator – “albeit on a slightly contracted market”.

End markets aside, the group has certainly improved financial performance due to areas within management’s control. Although sales were flat on the prior year, the group’s adjusted operating profit was 12 per cent to the good at £10.3mn. This reflects continuing investment in capital equipment to improve factory productivity. Efficiencies have improved due to a “significant reduction in reliance on agency staff” and customer service levels have returned to pre-pandemic status. This was partly achieved by an increase in available inventory, although this impacted working capital and cash-at-hand.   

Analysts at Investec are guiding for revenue of £86mn, rising to £92mn in 2025. Adjusted earnings per share (EPS) is expected to increase from 79.6p a share to 82.5p on the same basis.

To management’s credit, it has not tried to gloss over the challenges faced by the group, although the anticipated reversal of fortune may be pushed back until later in the year – we shall see. A forward rating of 14 times forecast earnings is well down on the consensus rate from a year ago, but we remain uncommitted given uncertainties over the timing of a market recovery. Hold.

Last IC view: Hold, 1,365p, 15 Sep 2023