Could there really be 63% upside at Walker Greenbank?

Today’s share price slump at upmarket wallpaper and fabrics maker Walker Greenbank (WGB) has been made all the more stunning by the speed at which its fortunes have turned.

At the start of last month, the company behind brands including Sanderson and Harlequin, said its UK orders were growing ahead of last year and on an improving trend in the run-up to its key autumn selling period.

Fast forward six weeks and Walker Greenbank warns that UK sales have weakened significantly against management expectations, with the company already more than half way through its normally seasonal strong point.

Full-year profits are now expected to be 10% lower than forecasts, triggering a 27% slump in its share price to a four-year low of 150p.

While no specific reasons were given for the sudden downturn, it’s reasonable to assume that consumer discretionary spending stocks such as Walker Greenbank will be vulnerable in the current climate.

Demand for wall coverings and fabrics is closely linked to moving house, which means a slowing top end of the property market is also bad news for the company.

So where does today’s warning leave this highly-regarded AIM stock, which has been listed on the stock market since 2003?

WH Ireland analyst John Cummins believes the share price reaction is overdone and has retained his ‘buy’ recommendation on a 12-month view with a target price of 245p. With the shares currently at 150p, that implies potential upside of 63%.

He said: “Whilst this morning’s news is clearly disappointing and the consumer environment is likely to remain challenging for some time, we believe Walker Greenbank remains strategically well positioned in its markets.”

Cummins points to the estimated 40% of sales generated overseas, with Walker Greenbank continuing to attract strong interest thanks to its “Made in Britain” products. Printed fabrics for all of the brands are manufactured in Lancaster at the Standfast & Barracks factory.

In addition, there’s continued strong growth in licensing income after the company said it was on track for a 15% rise on a like-for-like basis in the current financial year.

The group also benefits from a strong balance sheet and an improving dividend yield, which is forecast by WH Ireland to grow to 4.4% in 2020 from the 2.3% achieved in 2017.

In the meantime, Cummins has reduced 2018 revenue forecasts by £6.8 million to £108.2 million as a result of today’s warning. This results in full-year pre-tax profit forecasts moving £1.4 million lower to £12.7 million and EPS slipping 10% to 14.1p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.