UK Edition
This column is partial to a luxury goods stock, as the brands and quality of product on offer can foster customer loyalty, pricing power and ultimately high returns on capital and strong free cash flow.
Wallpaper-to‑fabrics company Sanderson Design Group, Walker Greenbank as was, can point to a rich heritage and strong brand portfolio that includes Zoffany, Harlequin and Morris & Co, and it therefore fits the bill nicely. However, we are 165pc to the good on the shares since our initial analysis of almost three years ago and now feels like a good time to lock in that handsome gain.
This may seem perverse given our predilection for luxury firms and the company’s highly encouraging interim results, which reported a profit, net cash on the balance sheet and a return to the dividend list. Yet there is method in the apparent madness.
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.
Sanderson has proved to be a classic example. When we first looked at the Aim-quoted concern, a flood at one factory, a fire at another and a profit warning had hammered the share price and persuaded John Sach, the chief executive at the time, to step down.
Since then, new leadership has come in and overseen both £3m in cost savings and huge improvements in the online and digital offerings, while focusing on both international markets and the potential for brand licensing deals.
A strong balance sheet helped see the firm through the pandemic and its strategies have started to pay off, as the profits and 0.75p-a-share interim dividend suggest.
The issue now is that the shares are way up from their lows and expectations are therefore higher. The shares trade at twice their net asset value, rather than at a discount. Past peak unadjusted* net earnings were around £7.5m a year and the current market value represents almost 20 times that figure.
Such multiples are not unusual for luxury goods firms by any means, but the rise in the earnings multiple may be largely played out now and that means investors could be left to rely on earnings growth for the bulk of their capital gains from here.
There is nothing necessarily wrong with that either, especially at a firm that can generate double-digit returns on capital when all is going well. But it also means that the share price may take greater heed of any stumbles or disappointments.
Dianne Thompson, chairman of the board, flagged the now market-wide themes of rising costs and supply chain complications in her outlook statement. While the board is working hard to reduce their impact and have the powerful Sanderson brand range to help them, this could put a lid on any positive surprises and increase the risk of more disagreeable ones.
It may therefore be time to (reluctantly) draw the curtains and take profits on Sanderson. That dividend, by the way, will be paid on Nov 26 to investors who are on the register on Friday.
Questor says: sell
Ticker: SDG
Share price at close: 200p
*This originally read adjusted. We apologise for the error
Update: Royal Dutch Shell
It may seem like tempting providence to discuss Royal Dutch Shell so close to its third-quarter results next week, but oil and gas prices remain firm and the balance between supply of and demand for hydrocarbons still seems to favour the latter – whether we like it or not as the Cop26 summit nears.
Usually, higher prices of a commodity are self-correcting, as they either choke off demand or prompt the creation of fresh supply. This may not be the case here, though. Energy demand is relatively price-inelastic at the best of times, while subsidies in some parts of the market only support demand.
In addition, fresh supply does not seem to be forthcoming, because of pressure on either the oil giants themselves from politicians and the public or potential sources of finance such as banks and pension funds. What executive would sanction a major exploration programme in the knowledge that they will be excoriated for it?
Oil and gas prices could yet surprise. Hold.
Questor says: hold
Ticker: RDSB
Share price at close: £17.90
Russ Mould is investment director at AJ Bell, the stockbroker
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