UK Edition
Questor: this wallpaper firm has had two thirds stripped from its share price and is now a buy
Questor share tip: a series of mishaps has sent shares in Walker Greenbank to a valuation of just seven times earnings, so there is plenty of scope for gains
Markets may be turning ugly, and this column continues to seek out stocks whose cheapness could provide protection against further falls and whose recovery potential offers the chance of gains.
Admittedly, this strategy requires patience and strong nerves, as evidenced by the mixed results generated so far by names such as Strix, Zytronic, Pressure Technologies and Xaar.
But another stock worthy of further research is Walker Greenbank, the wallpaper-to-fabrics group. It has a rich heritage and strong brands, which include Zoffany, Harlequin, Sanderson and Morris & Co, but the past three years have been ones to forget for the company.
A flooded factory, a fire at another facility and a profit warning have all torn a hole in the share price, which has fallen by two thirds. John Sach stepped down as chief executive in October, alongside first-half results that reported a 12pc drop in operating profits, so non-executive Christopher Rogers took the role of executive chairman until a new boss could be hired.
So far, so bad. But even with so many mishaps Walker Greenbank made an 8pc operating margin in the first half and a return on capital of 18pc last year. It has just £5.2m in debt (well within its overdraft and banking facilities limit of £22.5m) and although a £6.6m pension deficit must be watched, operating profits covered interest and pension costs by more than nine times.
As a result, time should be on the side of both the new management team and investors.
A forward price-to-earnings ratio of just over seven means that potential shareholders are not left as a hostage to fortune should profits disappoint once more (as is always a possibility), while the forward yield of 5.5pc comes from a dividend still more than twice covered by earnings.
Hopefully such tempting numbers mean investors can wait patiently for a turnaround. The clearest near-term risk is that trading in Britain remains subdued and that an international sales drive fails to compensate.
Questor says: buy
Ticker: WGB
Share price at close: 75.5p
Update: JPJ Group
The regulatory backlash against the gambling industry, whether on machines in shops or online, continues unabated and this column’s selection of JPJ, or JackpotJoy as it once was, looks less than smart as a result.
The shares have lost more than a quarter since our first look in October 2017 and last month’s third-quarter results help to explain why. Growth in average active customer numbers slowed to 3pc on a group-wide basis and sales and profits fell slightly at the JackpotJoy brand because of the closure of certain high-rolling customers’ accounts as a result of management’s efforts to comply with responsible gambling measures.
However, overseas growth was good, notably at the Vera & John brand, profit forecasts held firm after the update and the impact of the account closures should start to diminish over time.
In addition, JPJ remains very cash generative, with the prospect of cash returns via dividends or share buybacks looking good for 2019, and the shares look very cheap on less than six times next year’s earnings. That lowly multiple could at least help to protect against further falls even if the increase in remote gaming duty to 21pc, from 15pc, next April represents yet another regulatory obstacle.
JPJ remains a high-risk, potentially high-reward play for risk-tolerant investors.
Questor says: hold
Ticker: JPJ
Share price at close: 635p
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Update: TalkTalk
A far-from-successful pick of almost two years’ standing, TalkTalk remains of interest, even if the shares seem becalmed for now.
Last month’s first-half trading update read well enough, as 24,000 new customer wins in the second quarter took the company closer to its goal of 150,000 additions for the year, while good progress with cost cuts left the £15m target well within reach.
The turnaround story is taking longer than expected but if earnings do hit bottom this year the shares could start to send out stronger signals.
Questor says: hold
Ticker: TALK
Share price at close: 116.6p
Russ Mould is investment director at AJ Bell, the stockbroker
- Questor archive: telegraph.co.uk/questor