Stockwatch: An appealing bid target?

Here is a prime example of how the British economy can genuinely thrive after the EU referendum. A falling currency is a boon to exporters, but can they step up to the challenge? A dilemma is public policy in recent years having fostered getting rich more through property and importing than through selling abroad.

The economy has continued to shift from manufacturing to services, with banking especially important, hence "pass-porting" (of services in Europe) being critically in focus. So there's uncertainty whether the UK can genuinely take advantage, considering also that sterling's fall has not been from overvalued levels like it was in the early 1990s (when part of the European exchange rate mechanism).

If it leads to higher wages to cope with higher import costs, this will push up inflation. It's realistic not pessimistic to be concerned about "stagflation", with the Bank of England in a real dilemma as to how to address it.

AIM-listed Walker Greenbank captures all this. As a respected maker of high-quality interior furnishings, it rode the property boom from 2009 and has proven itself abroad: in the financial year to end-January 2016, 66% of revenue was UK-derived, 14% from continental Europe, 12% from the United States and 9% from rest of world.

It, therefore, has a springboard to capitalise on exports, just when the US economy is being heralded as "a consumers' paradise" of steady growth, low interest rates and a strong currency.

A recent profits slip is due largely to December's flooding of a fabric printing business European sales are not massive, such that, if the UK does run into obstacles re-negotiating trade access, the company will overall suffer. The chief uncertainty is to what extent UK discretionary spending may be affected by people re-thinking now holidays and cars for example are set to cost more.

Thus, the share price fell from 190p to 160p in response to the referendum result, then bounced to 180p with the market recovery, but, on consideration of the uncertainties, slid again to about 166p, currently 168.5p.

In magnitude the swings are nothing like housebuilders, even though Walker Greenbank is quite a tightly-held £100 million AIM company whose shares might be expected to move sharply.

It shows respect that this is a well-run operation: see the advance in operating margin since end-January 2013 and strong cash flow per share relative to earnings, which is generally more of a challenge for manufacturing firms.

A profits slip in the current financial year is due largely to December's flooding of a fabric printing business disrupting sales, with forecasts expecting a bounce-back in 2017, although these were made before the Brexit vote.

Attractions for a US acquirer

At this level, the stock initially appears high enough, trading on a forward price/earnings (PE) multiple of 16.5 for the current year to end-January 2017, reducing to 13 times for 2017/18. The yield isn't much - barely over 2% - and net tangible assets were 46.8p per share last January.

Yet Walker Greenbank has genuine intangible value in its brands and the circa 14% fall in sterling against the US dollar will make it attractive to a US acquirer - considering also that within the sales mix the US is now the group's second largest market, rising 20% in dollar terms or 12% in constant currency over the last financial year.

The synergistic case of acquiring Walker Greenbank would justify paying a premiumSooner or later, US firms will wise up to this. They continue to have access to cheap debt, using takeovers to bolster earnings. Financial history shows a trend of creative British firms being snapped up this way, and Walker Greenbank is not big to digest: the synergistic case of combining it would justify paying a premium to what currently looks a fair market value for a standalone enterprise.

April's prelim results cited "significant progress with market penetration through the development of the fourth collection from the Anthology brand. The wallpapers in this collection have been complemented by an exciting range of innovative wide-length fabrics.

"We also progressed with our digital sales and marketing strategy, including e-commerce development."

The launch of a Woodland Walk collection of wallpapers and fabrics, also Pure by Morris,  are said to be well-received, and this autumn will see a footwear range from a licensing agreement with the US brand Sperry.

So despite disruption from flooding, which meant a 4.5% slip in total brand sales at constant currency in the first four-and-a-half months of the financial year, the underlying picture is one of progress.

Sterling benefits of UK manufacturing base

Walker Greenbank is located at Loughborough for wallpaper printing and Lancaster for fabric printing: "this manufacturing capability is a key asset that differentiates us from others in our industry and puts us at the forefront of innovation in printing techniques."

This is another factor in takeover appeal. In past years, many UK manufacturers re-located to lower-cost venues, the highest-profile being Dyson to the Far East, yet currency factors' turning in the UK's favour may support a re-think.

This share is symbolic of whether the economy can thrive in a Brexit environmentWalker Greenbank shows how a UK location helps achieve better control over the manufacturing process, in the pursuit of quality. The net effect obviously depends also on what extent input costs - wages and raw materials - rise.

The group has only about £0.6 million borrowings against £2.9 million cash; the chief liability being a £4.3 million pension fund deficit in context of £35.3 million net assets, of which £7.1 million represented intangibles. So if consumer demand does suffer, the balance sheet can withstand it. This is likely another reason the stock has not fallen sharply.

Keep an eye, therefore, on what extent this manufacturing exporter benefits; it's symbolic whether the economy can thrive in a likely Brexit environment of lower sterling versus subdued domestic consumer spending. The stock's risk/reward profile tips to "accumulate" steadily, and as evidence evolves of Walker Greenback's appeal to Americans.

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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.