International growth at Churchill China

Churchill China (LON: CHH) continues to win market share in Europe as it broadens its distribution network and that help the hospitality ceramics manufacturer to beat 2022 expectations. However, management is cautious about the UK prospects.  

Exports are nearly two-thirds of hospitality revenues. Churchill China has around 6% of the continental European market. Sales and marketing is being increased in the region. Other international markets are also growing.

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In the UK, the acquisition of the Dudson brand has helped to win new customers. UK hospitality market share is around 30%. The retail sales have fallen to £2.4m, so they are less than 3% of the total.

Materials sales were 37% ahead at £7.2m and the profit contribution more than doubled to £1.2m. This reflects strong demand from other UK ceramics manufacturers.

Problems recruiting have hampered production efficiency at Churchill China, but volumes were still 30% ahead of those in 2021. Energy costs have been hedged and they are currently lower. Solar panels have been installed. Capital investment will help to improve efficiency.

In 2022, revenues improved from £60.8m to £82.5m and pre-exceptional profit rose from £6m to £9.1m. The dividend is being increased from 24p a share to 31.5p a share and that is still more than twice covered by earnings.

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There was a reduction in cash from £19.1m to £14.7m, which was mainly down to an increase in inventories. Longer production runs are one way to improve efficiency and they lead to higher stocks. This level of stock is not likely to reduce significantly as Churchill China tries to ensure that it has a full range of products to satisfy demand.

The high level of capital investment means that there could be another fall in cash this year. Michael Cunningham will be joining the company as finance director on 1 June.

The order book is stronger than normal, and the year has started well. Singer forecasts a 2023 pre-tax profit of £11.3m and another jump in dividend to 39.1p a share. At 1285p, the shares are trading on less than 17 times prospective earnings.

There is uncertainty about the outlook for the year, but there is undoubtedly strong demand for Churchill China products and scope for further market share gains in Europe. An attractive long-term investment.

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