The benefits of Churchill China’s lockdown approach

  • Continued market share growth
  • Efficiency issues due to labor shortages

Churchill China (CHH) was one of those companies that suffered direct and indirect impacts from the pandemic, a confirmed spike in the ceramics maker’s sales and profitability in 2020. Trading recovered considerably over the past year, omicron notwithstanding, as the hospitality industry came back to life. But its latest half-year numbers point to a real reversal of fortunes, as financial metrics appear to be moving back on the upward path visible in the pre-pandemic era.

Demand for the Stoke-on-Trent-based company’s products dried up overnight as Europe’s hotel industry halved in the months after the outbreak. The dividend was duly suspended while other measures designed to reduce working capital demands were put in place, although Churchill continued to focus on supply chain security, hence the elevated inventory levels thereafter. The company’s sales team remained active during the recession, while its distribution center in Rotterdam allowed the company to overcome broader logistics problems.

The half-year figures reinforce the notion that management decided to address the business disruption caused by Covid-19, not as simply an unwanted pause in trading, but as an opportunity to increase market share. It would be unwise to read too much into comparisons with the half of 2021, however, the figures suggest that the stronger revenue is in part related to market share gains, possibly as a result of prioritization of customer service and product availability. product versus interruption. . It is perhaps telling that overall hotel sales rose by a third in “the last significant comparison in 2019”, with mainland Europe still in the lead. Sales in the UK, which initially lagged behind the general recovery, have also picked up sharply, presumably in part reflecting pent-up demand.

As expected, energy costs have had a negative impact on profitability, although the company has been able to pass on a significant proportion of the increases to customers. Adjusted markup fell by 160 basis points from the end of the year to 8.5 percent, but the contrast with the 2019 comparator was even starker. The company notes that the price increase initiated in May 2022 will not affect reported performance until the second half of this year. Profitability was also limited by a general labor shortage, as the need to meet higher production volumes was hampered by a less experienced workforce.

Steps are being taken to increase worker efficiency, but pressure on margins and fears of a recession remain major issues going forward. The market looks on track judging by a forward PE multiple of 19 times Singer Capital Markets’ 2022 EPS forecast. Hold.

IC Last Seen: Waiting, 1465p, Apr 21, 2022

ORDER PRICE: 1,222p MARKET VALUE: £134 million
PLAY: 1,170-1,250p MAXIMUM OF 12 MONTHS: 2,050p LOW: 1,020p
NET ASSET VALUE: 397p NET CASH: £10.1 million
Semiannual to June 30 Turnover (millions of pounds sterling) Profit before tax (millions of pounds sterling) Earnings per share (p) Dividend per share (p)
2021 23.9 0.98 4.50 6.70
2022 41.4 3.90 28.9 10.5
% change +73 +299 +542 +57
Former division: September 22
Payment: September 30th

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