A savage 43% share price slump to 120p following a profit warning on 15 November leaves luxury interior furnishings maker Walker Greenbank (WGB:AIM) looking significantly oversold.

Shares believes the investment case of international export and licensing growth business remains intact, while sentiment towards the stock should improve once its core UK market begins to stabilise. A chunky dividend yield provides downside protection.

Harshly punished

In November, the £87.2m cap warned that UK brand sales had ‘weakened significantly’ versus management expectations, meaning profit for the year to 31 January 2018 will be around 10% lower than previous forecasts. Given the modest size of the earnings downgrade, a 40%-plus share price slump seems disproportionate.

Chief executive John Sach conceded that ‘momentum in order intake has not been sustained’, disappointing as Walker Greenbank had only recently highlighted an improving trend heading into the Autumn selling season.

Stripping out October 2016 acquisition Clarke & Clarke, an exciting deal that has extended Walker’s reach in the US market, UK demand for Walker Greenbank’s premium brands has disappointed.

British consumers are evidently scaling back spend amid economic and political uncertainty, while lower housing activity at the premium end of the market is also having an impact.

Competitive strengths

Among the competitive strengths of Walker Greenbank, whose winning portfolio of brands includes Sanderson, Morris & Co, Harlequin, Zoffany, as well as more recent lines Scion and Anthology, is the fact it boasts its own wallpaper and fabric printing factories in Loughborough and Lancaster respectively.

On the flip-side, as Investec Securities explains: ‘With its vertically integrated model, declining UK brand sales have also had a knock-on effect on manufacturing sales and profitability.’

Overseas and oversold

The good news is this small cap has very attractive overseas growth potential. Walker Greenbank’s products are solid in 85-plus countries and its international and licensing revenues are trading ahead of the prior year.

Balance sheet gearing is expected to be modest at the end of the current financial year, with positive cash generation anticipated thereafter. Research house Edison now forecasts normalised pre-tax profit of £12.9m for the year to January 2018, anticipating a dividend hike from 3.6p to 4.5p.

A payout covered more than three times by estimated earnings of 14.5p, Walker’s dividend yield of 3.75% and forward price to earnings ratio of 8.3 indicate value. For 2019, Edison sees pre-tax profit building to £13.4m with the shareholder reward rising to 5.6p.

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