Stockwatch: Could this UK company be another takeover target?

by Edmond Jackson from interactive investor |

After correctly picking Haynes as a bid target, our companies analyst spots another vulnerable stock.

A weak pound keeps attracting foreign takeovers of well-positioned UK small caps. Its relatively open regulation and enough high-caliber firms, London is one of the prime stock markets for global takeovers. 

The prospect is enhanced by traders’ psychology, whereby stocks lacking in near-term growth appeal are prone to trade at a discount to the longer-term earning power they’re more capable of. Companies are also vulnerable if a rival identifies “synergies” where combining operations could lead to “2 + 2 = 5”.

Near-200% bid premium shows the market misvalued Haynes

Such a tradition has pitched another episode this week: the £115 million acquisition of Haynes Publishing Group (LSE:HYNS) by Infropro Digital, a French company that has long admired Haynes’ strength in vehicle maintenance manuals.

Haynes has undergone a repositioning to better capitalise on digital, on which basis I drew attention as a “buy” last September at 243p, declaring it “an obvious takeover target…the price/earnings (PE) multiple is about 12 times and free cash flow of about 10, which is again attractive to a bidder.”

Haynes also reinvented itself from a perceived reliance on DIY car/motorbike manuals towards professional mechanics, internationally. Moreover, its last financial year to end-May showed a 20% rise in revenues from this professional segment, offsetting a 4% slip on the consumer side (that had led to a perception of “ex-growth”). 

So, there was a definite aspect of “something new” driving profits higher, which at the pre-tax level jumped 24%, backed by net cashflow from operations up 21% thereby eliminating debt and doubling net cash. So Haynes shares began steadily rising, to near 430p by early December, then flat-lined until a 700p a share cash offer came in this week.  

That’s a near 200% uplift on levels the stock has traded for the last five years despite the company explaining efforts to reposition.

Weighing up future possible takeovers while sterling remains weak on the international exchanges, it should also be appreciated that Haynes enjoys status as market leader in a specialist field – i.e. a competitive “moat” also of appeal to a predator.

However, a parallel to watch out for is the market disregarding stocks on the market fringe, that trade down to single-figure PE multiples, where an acquirer can revitalise prospects by integrating the products into its own sales channels.

Walker Greenbank is quite similarly being shunned

Coincidentally, this £56 million AIM-listed “international luxury interior furnishings” company has just seen its stock rise over 10% to 78.5p after delivering an “in line” update in respect of its financial year that closed 31 January.

I drew attention at 75p in November 2018 after a long fall from 242p in late 2017, significantly related to a sluggish housing market – given moving is typically when makeovers happen to help people feel good in their new homes. As with Haynes some years ago, the narrative had become unreliable and led to profit warnings.

However, it interested me that Walker Greenbank had changed its CEO of 10 years, hence providing potential to wrest improvements, if still significantly at the behest of the housing market.

Source: TradingView Past performance is not a guide to future performance

Encouragingly, the “Boris majority” appears to be easing stasis for housing sales - prices have risen in January, and I’ve seen a slew of sales in Surrey estate agent windows. Some say this could yet peter out once the realities of Britain leaving the EU become clear. Yet, for now, 10 Downing Street’s zeal to deliver on election promises is reflected also in the ruthless cabinet reshuffle to promote those most loyal and energetic.

Though wary of Boris, I respect he could continue on his winning spree. If so and people’s confidence improves, the housing market will too.

Technically, and as a reflection on the balance of sentiment, Walker Greenbank stock has jumped without much positive substance, it being chiefly on “no further bad news” – as if a sideways consolidation over 18 months or so has well priced in the risks. So, if the company can make better progress with the housing market, any improvement in its narrative should help its stock rating.

Walker Greenbank - financial summary            
year ended 31 Jan            
  2014 2015 2016 2017 2018 2019
Turnover (£ million) 78.4 83.4 87.8 92.4 112 113.0
Operating margin (%) 8.3 8.8 9.3 8.3 11.8 5.8
Operating profit (£m) 6.5 7.3 8.2 7.7 13.2 6.6
Net profit (£m) 5.0 5.1 5.9 5.4 11.9 5.1
Reported earnings/share (p) 8.1 8.3 9.5 8.1 16.8 7.2
Normalised earnings/share (p) 8.1 9.4 13.8 25.0 21.6 11.2
Earnings per share growth (%) 18.2 15.7 46.2 81.7 -13.7 -48.2
Price/earnings multiple (x)           7.0
Operating cashflow/share (p) 9.6 5.3 10.3 15.0 6.4 16.3
Capex/share (p) 7.7 5.3 4.1 10.2 4.9 4.2
Free cashflow/share (p) 1.9 0.0 6.2 4.8 1.5 12.1
Dividend per share (p) 1.9 2.3 2.9 3.6 4.4 3.2
Dividend yield (%)           4.1
Covered by earnings (x) 4.4 3.6 3.3 2.2 3.9 2.2
Net debt (£m) -1.5 0.0 -2.3 5.3 5.3 -0.4
Net assets per share (p) 45.5 45.1 58.6 73.7 87.2 85.8
             
Source: Historic Company REFS and company accounts            

Risk/reward profile can tilt to upside with better trading

At 78.5p, the stock trades on a sub 9x PE multiple, assuming that consensus expectations for £6.3 million net profit this latest financial year align with the board’s expectations, just affirmed. A further projected cut in the dividend to about 2.5p means a scant yield of over 3%, should the narrative persist as mediocre. More positively, the table shows the trend in free cashflow per share improving radically in the 2018/19 year, as if underlying changes are showing through.

Also in terms of limiting downside risk, the stock is fairly asset backed around its current share price. While the end-July balance sheet did show 45% of net assets constituting intangibles, with net tangible asset value per share at 51.4p, it could be argued a portfolio of respected consumer brands – Sanderson, Morris & Co, Harlequin, Zoffany and others - does deserve some recognition.

Instead, a conservative view would beware of over-counting: assets are only worth what they can earn. A middle ground, if somewhat speculative view, is of Walker Greenbank shares being worth what someone is willing to pay.

The latest update cites group sales down 2% to around £111 million, reflecting a generally difficult marketplace offset by continued strong performance from the Morris & Co and Clarke & Clarke core brands, licensing and digital fabric printing. Mind, however, that while brand sales fell 3% in the UK – the group’s largest market – they were down 3.8% in the US in reportable currency or 6.9% in constant currency.

The alibi provided is “a necessary change mid-year in the distribution of Clarke & Clarke brands”, and the new distributor – raising coverage to Canada – is said performing in line with expectations. Brand sales to Northern Europe edged up 1.1% or 2.1% at constant currency. 

As declared, it is insipid and affirms the single-figure PE. However, this could take attention from Walker Greenbank being well-positioned for any improvements in demand. The Morris & Co brand saw 22.3% growth at constant currency and investment continues to leverage this brand, which in Scandinavia enjoys 28.7% growth.  

Also, “the integration of the Clarke & Clarke business is now complete and positive growth continues from this brand.” The high-margin licensing business has enjoyed income up 13.9% to £3.5 million, with strong performance from bedding, blinds and Japanese licensees. Additionally, third party manufacturing sales rose 5.5% to £21.1 million.  

What frustrates about a selection of positive snippets like this is one’s sense that other businesses must be underperforming, given total sales show modest annual downturn. Better would be for managers to present the overall picture, as explanation is needed where there are shortfalls and to decipher scope for turning around.

Quite likely to mark time until 23 April prelims 

Management's cautious outlook suggests the market will await more evidence unless there is first a more marked improvement in the housing market and/or small cap stocks. Hopefully, a more incisive operating review will emerge, and a new chief financial officer is apparently close to being confirmed.

A catalyst for Haynes’ takeover was its September 2019 results affirming its re-position in digital, plus the narrative of “accelerating the linking of the group’s content and datasets, our teams being well positioned to deliver new and exciting global growth opportunities.” Frankly, Haynes was shifting up gears near the top, whereas Walker Greenbank still seems to be trundling along in second.

So, while I draw parallels between the two - Walker Greenbank’s update and stock rise indicating it could now be set to benefit if the housing market continues to firm - I temper enthusiasm until there is more evidence.  It’s one to put more intently on the watch list. For now: Hold.

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

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