- Share price of fabrics and wallpapers expert falls to lowest mark since summer 2020
- Hoped-for second-half recovery fails to arrive
- UK market particularly weak as financial year end approaches
- Net cash balance sheet a welcome source of support
“It is often a bad sign when management pins its hopes on a ‘second-half recovery’ when it comes to meeting earnings forecasts and shares in wallpaper-to-fabrics group Sanderson are unravelling after a weaker-than-expected end to its financial year,” says AJ Bell investment director Russ Mould. “That follows last June’s trading alert and leaves the shares at their lowest mark since summer 2020, when Covid-19 and lockdowns were still doing their worst.
Source: LSEG Refinitiv data
“Chief executive Lisa Montague has noted a particularly weak finish to the financial year to January 2025 here in the UK, where soft consumer confidence has hit demand for Sanderson’s branded products, which include Zoffany, Harlequin, and Morris & Co. America also ended the year on a softer note, while Sanderson’s manufacturing operations have also failed to meet expectations, as customers back away from repeat orders and reduce run sizes, trends which both hit capacity utilisation rates and overhead recovery, to the clear detriment of profit margins.
“One bright spot remains licensing, where revenues for the year to January 2025 look set to come in broadly flat, and this is a high-margin revenue stream.
“Overall, however, management now expects a 7% drop in full-year sales to £101 million. As a result, underlying pre-tax profit is expected to fall by some 60% to between £4.0 million and £4.8 million, a range which undershoots the prevailing analysts’ consensus of £5.6 million.
“The difficult end to the last financial year also bodes ill for the start of the new one, to January 2026. Analysts had pencilled in a modest 4% improvement in sales to £106 million and pre-tax income of £6.3 million for the coming twelve months but with two profit warnings in the bag a third cannot be ruled out, as trading alerts have a bad habit of coming along like buses – in clumps.
Source: Company accounts. Financial year to January. *2025E based on management guidance given alongside profit warning on 20 January
“Analysts and shareholders will find out more when the full-year results are released in April 2025, but the balance sheet does offer some good news.
“Sanderson still expects to end the last financial year with a net cash pile of some £5 million. That does represent a sharp drop from £16.3 million a year ago, thanks to an increase in inventory of unsold stock, substantial capital expenditure and a £2.3 million pension fund contribution, but it could help to underpin the share price at some stage, given that Sanderson’s stock market valuation is down to £33 million after Monday’s slump.
“That lowly figure represents less than four times the £9 million in after-tax profits recorded at prior peaks in 2018 and 2023, a multiple which could intrigue any patient, contrarian investor who believes the company is enduring a cyclical dip rather than any more deterioration in its business model. Sanderson’s rich heritage and strong brands, which date back to the days when it was known as Walker Greenbank, could easily serve it well as and when the economy turns for the better.
“Value-hunters may also note how that £33 million market capitalisation compares to £86.7 million in shareholders’ funds at the half-year stage. That is a very lofty discount to net asset, or book, value and the gap is still large even if £27 million in intangible assets are excluded from the calculation.
“Many of the best returns from a stock come when the picture goes from truly awful to merely less bad, because expectations are low and valuations are often accordingly bombed out, and Sanderson’s valuation is indeed starting to look very depressed, based on past-peak earnings and asset value.”
