Edmond Jackson's Stockwatch: AGA Rangemaster Group

Since I drew attention to the FTSE SmallCap shares in AGA Rangemaster Group, firstly last August and again in November, the classic range cooker manufacturer has made useful progress - up from 60p to a recent 12-month high of 92p, consolidating near 80p.

This reflects divided market opinion: the company faces difficult consumer markets, but has iconic British brands with global marketing potential to the aspirant classes. The essential view I derive from this is the shares are therefore rated modestly for earnings, which increases the company's appeal as a takeover target for a larger manufacturer seeking bolt-on growth.

The 8 March, 2012 results affirmed a profile of challenged revenues, albeit cost and efficiency programmes enhancing operating profit - which edged up 6.6% on continuing operational revenue down 2% to £244.6 million. While pre-tax profit improved 12% to £8.4 million, on a standard UK tax charge underlying earnings per share were flat at 7.1p. The dividend has been omitted in order to help resolve pension fund issues.

While these key financials look unappealing, in terms of the investment rationale I have set out the sales of AGA cookers, Fired Earth tiles and Marvel refrigerators are said to be showing encouraging progress; also international investments and collaborations - such as in China - provide a framework for more rapid expansion. Management is positive that "with major marketing initiatives imminent we expect to see greater impetus in the coming months".

The three top directors have backed their words: the chief executive and finance director respectively buying 26,270 shares and 15,420 shares, followed by the chairman with 11,510 shares, all at 86.8p. While their total holdings do not even reach 1%, the buying does at least set a marker for value.

A 1 May interim management statement has reiterated this profile of increased profitability versus revenues slightly down amid little respite to the long-running weakness in consumer markets. It appears consistent enough with the outlook stated in March: of a slow January and positive February, with AGA Marvel and Fired Earth doing well in the US, but AGA orders flat and Rangemaster orders trending down - albeit pending sales and marketing initiatives this spring.

However, the company said: "We do not take the slow start to the year as indicative of the full year ahead as lead indicators and order intake levels, now level with last year, have become more encouraging."

A read-over from America to the UK is suggested, where government encouragement of greater mortgage availability has prompted increased appliance sales.

Management does need to show it can drive sales, as the benefits from efficiencies can only last so long to drive profit growth. Further rationalisation is underway at Waterford Stanley in Ireland and Grange in North America. Recent innovations such as AGA Total Control, a three-door cooker with state-of-the-art touch controls "allow [AGA] to establish positions in faster-growing markets where we can make use of the operational gearing available within the business."

The firm's key objectives this year are to increase AGA sales, particularly abroad; market a wider offering from Rangemaster; and return Fired Earth to profit. Two-thirds of AGA sales are now electric, which mitigates running costs.

Forecasts are cautious with Numis (AGA's broker) and N+1 Singer (the only two comprising the Company REFS consensus) looking for a drop in profit and earnings this year and with the 2014 outlook shy of 2012's performance. Undemanding forecasts are beneficial if fundamentals can improve and I would emphasise the directors' share buying as suggesting risk lies modestly on the upside. Another broker, Espirito Santo Execution Noble, has reiterated its 'buy' stance with a 95p target price following the 1 May update. Even the cautious forecasts imply a modest price/earnings multiple under 10 times.

In terms of geographic exposure the UK represented 63% of 2012 turnover, Europe 22%, North America 12% and rest-of-world 3%. The goal is for 50% of business to be outside the UK and "newly established commercial links, like that with Vatti in China, will add to the pace of improvement".

The end-December balance sheet had net assets of £141.2 million or 204p a share, including £65.3 million goodwill and £24.5 million intangible assets - fair to an extent, given the "heritage" type brands - otherwise net tangible assets per share of 74p, which ought to give shareholders comfort. AGA has traded up to 162p/141p/138p during 2009-11, and down to 54p last year, so is mid-range in its chart despite a near 50% rise in recent months.

Borrowings are £14.2 million longer-term and £1.3 million shorter-term, offset by £21 million cash. The cash-flow statement shows £16.0 million applied for pension deficit recovery, £7.3 million on pension credit and contributions, and a net £4.7 million spent on investment, to explain the drop in cash from £48.1 million. The appraised pension deficit is intended to be eliminated by 2022 with a further £30 million payable in 2020 - hence the lack of dividend forecasts.

All told, the business is improving for when demand does pick up - which is the more likely time frame for a takeover approach, although it could happen anytime in anticipation. The main risk is a further crisis in the global economy, affecting consumer spending, otherwise the AGA Rangemaster turnaround looks to have further upside.

For more information see agarangemaster.com.