Boring Business -- Exciting Numbers

Published in Company Comment on 2 August 2010

This small cap may be mundane unless you like flowery fabrics -- but its numbers aren't.

Wallpaper and soft fabrics may not be the most exciting investment opportunity you've ever come across, but if investing history has shown us anything, it's that the boring tortoise beats the exciting hare nine times out of ten.

Wall-coverings, furnishing and fabrics designer and manufacturer Walker Greenbank (LSE: WGB) whose brands include the famous William Morris, may well prove to be a tortoise about to put on something of a spurt. The company operates worldwide and has showrooms at Chelsea Harbour, and the Decoration & Design building in New York.

Going great guns

Last Wednesday, Walker Greenbank told us first-half pre-tax profit is expected to nearly quadruple that of the same period last year. The group says its middle of the range brands Sanderson and Harlequin are the top performers, whilst premium-end brand Zoffany has returned to growth in the first half.

This gave the shares a bit of a fillip as one might expect -- but perhaps not enough of one, given the company's value credentials. At the time of writing, the shares stand at 33.5p, a long way north of the absolute nadir of 7p reached at the end of March last year when shotguns, stockades and stockpiles of baked beans were nearer the forefront of investors' minds than floral fabrics and wallpapers. This price values the AIM-listed group at under £20m.

We're told that on sales of "at least" £33m, underlying operating profits before exceptionals will be around £2m and pre-tax profit is expected to be £2.1m. The company now looks forward to the full year with "confidence".

Lowly rating

The brokers, meanwhile, have earnings of 4.7p pencilled in for 2011, rising to 5.2p the following year. These forecasts look well within reach if the company continues to see anything like the continued interest it has recently witnessed -- and place the company on a relatively miserly forward price-to-earnings ratio of just 6.

The balance sheet also looks strong for those of us that like to look down before we look up. With its final results for the year to the end of January, the company (which, by the way, reinstated its dividend, after an absence of five years, coughing up 0.5p to loyal shareholders) had substantially reduced its gearing to 17%, managed a pre-tax profit on the year of £1.6m, had net assets of £18.8m, and net tangible assets of £7.3m -- which included cash of £2.3m.

Concerns

It seems the market is still, understandably, nervous about consumer spending. Rising interest rates and falling house prices, which many of us expect to see, would do nothing to help Walker Greenbank. On the other hand, the company could be in for some fun given anything like a sustained recovery. Remember that the last year was the "toughest the group has encountered for many years" yet it still managed to bring home the bacon.

The turnaround recently confirmed for the first six months of this year doesn't yet look fully reflected in the valuation placed on the company by Mr Market. That isn't to say the shares won't tread water for a while as we wait for the next news.

But the company's ability to trade profitably through the recession, the real evidence that it has now turned the corner -- together with its fundamentally cheap valuation make it an interesting investment candidate.

Perhaps the ordinary punters in the middle of the market are getting fed up with painting plasterwork in neutral colours at long last, and are buying Walker Greenbank's various colourful prints around the world?

Whatever; I'm already over-analysing. The point is that the shares look overlooked and undervalued -- and look a much better buy for my money than the ornate fabrics and furnishings they provide; each to their own.   

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