Stockwatch: a British brand worth sticking with?

While this British brand counts the lockdown cost, our companies analyst examines the recovery potential.

It is 32 years since Portmeirion (LSE:PMP) Potteries floated amid 1980s enthusiasm for its cups and crockery sets from the aspiring Japanese middle class.

The business actually goes back to 1960 and the Botanic Garden range to 1972 – so it has been around a good while but has yet to pass £100 million annual turnover despite diversifying by acquisitions.

The company hit trouble in the late 1990s, its AIM-listed stock (PMP) falling from over 500p to below 150p, then traded sideways for five years. Recovering to 350p it was then set back to 110p by the 2008 crisis after which the company bought the Royal Worcester and Spode brands out of administration and changed its name to Portmeirion Group.

Looking somewhat vulnerable amid weak sterling

I made a decent-enough “buy” call at 475p in December 2010, given the price had re-rated to over 1250p by June 2018, but it had dropped off my radar and de-rated sharply last year to 800p – a fall that persisted this year before the Covid-19 lockdown.

The trend has since been roughly in line with the market: after a 240p low was hit on 26 March, monetary stimulus and government support for businesses/employees helped a rebound to 480p by end-April; but further consideration of commercial reality has checked the price to 390p.

I would not be surprised if it rises modestly this week after the news, non-essential shops are to open from 15 June.

I am intrigued at the chances this could end up acquired like many small caps that are internationally recognisable, especially while sterling is weak. Or do its 2019 problems suggest its core brand is now waning?

The 2019 results show a 5.1% decline in like-for-like revenue to £85 million, albeit a 3.6% overall rise to £92.8 million helped by last July’s acquisition of Nambé, a premium US homewares company.

Despite this business being barely profitable the aim was to leverage its sales by pushing product through Portmeirion’s 'global' channels.

For the time being, underlying group revenue fell due to a reduction in demand for the Botanic Gardens range in global export sales, which were then shipped into the South Korean market (presumably in a sense, it was the best chance of clearing excess stock).

Thus sales into South Korea jumped 39% to £11.4 million although 12% of group total remains small beer – considering the scale of opportunity the Far East ought to offer, e.g. China’s rising middle class (and whatever happened to Portmeirion in Japan?).

The end-2019 group balance sheet also showed inventories up 39% to £26.6 million.

South Korean sales also appear boosted by “a large number of exclusive new product ranges for our long-term distributor”.

Management has appointed a new retailer there for Royal Worcester and speaks of “regenerating this sales market through 2020”.

Good progress in the US albeit flagging in export markets

Management highlights a global business selling to 70 countries, however the UK then the US and South Korea, dominate. At least that might not imply material sales to the EU, hampered by a hard Brexit.

The 2016 acquisition of Wax Lyrical made the UK Portmeirion’s largest market at 35% of group sales, up 3.5% on the year as all-round improvements offset weaker demand – said due to political uncertainties.

The US represented nearly 35% of sales, up 22% after 17% organic growth was boosted by a five-month contribution from Nambé: which counters the adage how US expansion can be a graveyard for UK small caps.

Yet it is hard to escape a sense of something amiss, when total rest-of-world sales fell 30% to 18% of group total.

Some 30% of UK/US sales are now made online so at least Portmeirion is attuned in this respect, and this week has started with news how non-essential UK shops are to open from 15 June. It remains to be seen how social distancing and people’s caution generally, affect retail sales, as well as a likely rise in unemployment as the furlough scheme expires.  

A business now buckled down in response to Covid-19

The sense of pressure is implied also by Portmeirion resorting promptly to government job retention schemes as “very beneficial to reducing our short-term operational cost base” although it is not specified just how reliant.

An update on 30 March spoke vaguely of “delaying” dividend payments, which is different from “omitting” (though I assume it is the later), with capital expenditure also stripped back.

The 2019 cash flow statement had anyway shown a £6.6 million net inflow from operations to become a £0.6 million outflow – chiefly as inventories/receivables rose – with the investing side of the statement showing £11 million spent on the US acquisition plus property/plant etc, partly offset by £3.3 million proceeds from divestments.

The annual cost of circa 37.5p a share, historic annual dividends, was around £4 million, with end-2019 group cash falling from £7.2 million to £1.2 million.

So twinning these cash flow dynamics with the current narrative, pay-outs have looked compromised even before Covid-19. This could weigh on the shares but potentially also facilitate a takeover – shareholders being more willing to accept an exit.

The 19 May AGM statement makes forecasts impossible

After the Stoke-on-Trent ceramic factory shut in late March it partially re-opened in early May at reduced capacity.

More positively, a benefit of diversification is the home fragrance company, Wax Lyrical, switching production to hand sanitiser with “over 1 million units” expected to be shipped during the second quarter of 2020.

While the group has been “significantly impacted by lockdown and we expect this to continue through the second quarter until there is clarity around how and when stores will re-open”, there is encouragement from the 15 June opening date.

Orders continue to be shipped to the Far East where stores have re-opened and e-commerce sales more than doubled in April. However, it is hard to see this offsetting the overall fall.

Yet there are modestly optimistic scenarios, short and long-term

Despite my doubts I think patient holders should hang on: the 19 May update cited expected cash burn in the second quarter of £1 million with sufficient committed bank facilities and headroom; meanwhile retailers are re-opening.

A worse-case scenario would be Covid-19 dragging on to result in a debt burden that hampers Portmeirion along with sluggish revenues.

That "something new" to refresh reliance on Botanic Garden, proves elusive. But I think more likely the virus will steadily abate so long as people take care.

In principle, buyers would wait at least for a messy set of interims and more evidence Portmeirion can counter decline in its flagship brand – which begs questions over 35% of 452p net asset value per share constituting goodwill/intangibles.

In practice the shares could react more in the short term to the macro news on retail openings, then continued progress defeating the virus if that happens. Hold.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.