CHURCHILL CHINA (LSE:CHH)

455.00
Today's low: 460.00
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465.00
Today's high: 460.50
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Last trade:
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Change:
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Volume:
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Delayed price:
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Churchill China in 1 minute 53 seconds

The price is wrong Churchill China is a stable, profitable manufacturer of tableware with a proud heritage that has found an answer to low-cost competition. The only questionable thing about it is the price.- Churchill China manufactures tableware in Stoke on Trent, mostly for hotels, pubs, restaurants, cruise ships and the healthcare sector. It also distributes a wider range of ceramic and glass tableware sourced abroad for independent retailers and department stores. The hospitality business is over twice the size of the retail business, which the company is shrinking. It's emphasising quality and design, offering 'best cost-in-use', i.e. higher prices and fewer breakages. Bargain/Turnaround/Cyclical/Stalwart/Growth: Through a decade of change and investment the company has reported remarkably stable returns on capital averaging 5% without recourse to debt. It's a modest return, but rivals went bust in the face of cheap foreign competition and recession. Expectations: Churchill will continue to focus on hospitality products made to a high standard in the UK. Increasing automation and innovation enable it to produce high quality attractive designs cost-effectively giving it market leadership in the UK and global ambition (37% of revenues are from abroad) . It's committed to retrenching retail to its middle-market niche, where profit margins are higher and more reliable and Churchill's design expertise adds value. Threats: competition
Churchill's strategy is a response to low-cost competition from abroad. The company is retreating from the low-end of the retail market, where it can't compete, and pinning its ambitions on hospitality, where superior quality and customer service matter. I think its performance shows the strategy is working. management
Chief executive Andrew Roper has worked for Churchill China since 1973, and is one of a number of family members to have substantial shareholdings. The value of his shares is nine times his 2011 salary, which gives him an incentive to steward the company. With Roper in charge, I think Churchill China will remain a stable yet innovative business. finances
With no debt, tiny operating leases and a modest defined benefit pension obligation the company could probably withstand a bull in its china shop. valuation
Churchill China's valuation is the biggest risk facing investors in a company that is otherwise almost perfect for investment. At £3.35 the company's earnings yield is about 5%, scant return for what is admittedly little risk. Perhaps investors are paying for dependability. - Verdict: A 5% earnings yield is the same as a price earnings ratio of 20, which is my best estimate based on the last nine years. An investor might pay for that in a company with strong prospects for growth, and arguably, having invested so heavily, Churchill China has a more profitable future ahead of it. My perception is of a company that is holding its own against often cheaper, and often inferior, competition. It's a company I'd like to add to the Thrifty 30, but at a lower price. Notes:

Comments

Great analysis as ever Richard. I'm 'kind of familiar' (!) with this one because it was a peer (of sorts) of Waterford Wedgwood's ceramics business when I covered WW in my analyst days. The only things I'd add to / query from the above, based on my experience with WW would be:

(i) FX - this was a major problem for WW, particularly on the crystal side (manufacturing in Ireland i.e. Euroland and exporting chiefly to the US i.e. dollarland). As nearly 40% of Churchill's output is exported, as you note above, this is something to watch out for as sterling rises (as it currently is)

(ii) Differentiation - I hear your point about "high quality attractive designs" but at the end of the day there isn't a whole lot you can do with a cup and saucer to make it command a massive premium over what you can buy in Tesco for half nothing. As rivals in emerging markets move up the value chain, this is going to cause increasing problems for Churchill. Towards the end WW moved a lot of ceramics production out of Stoke and into Indonesia.

(iii) Lifestyle - I don't know if this applies to Churchill or not, but one push-back against WW's products was that many of them aren't dishwasher friendly. As people are increasingly time-poor, they are happy to use cheaper stuff. As hotel chains cut costs, this may be a factor, or it may not, as I say I don't know about Churchill's dishwasher qualities (!)

(iv) Capital - I seem to recall WW had to invest a surprising amount of money in new equipment - how well-invested is Churchill's manufacturing base?

[...] Lewis wrote an interesting piece on Cambrian that’s worth checking out, while Richard wrote a blog post on Churchill China that brought back memories from the time I covered Waterford Wedgwood as a [...]

Hi Philip, thanks for the comments.

Foreign exchange - bit of a blindspot of mine, because I expect to hold for at least three years and possibly much longer I tend to let managers worry about foreign exchange issues.

Differentiation, I buy the company's line on this one - that its products last longer and offer low 'total cost of ownership'. It ties into point iv. They've invested £20m in new facilities in the last decade. But I'm no expert on china so I take comfort from its performance, which seems to have been more resilient than for the industry in general. I also think quality matters less in retail (but Churchill China is shrinking that size of the business).

I think its well invested. That may be a reason for the recent rise in sp, investors anticipate less capital expenditure in the immediate future (just guessing!).

Dishwasher safe - yes.

Great stuff Richard. I suppose one other factor to add to your points and mine is that Churchill is probably the last scale producer of ceramics left in Staffordshire, which probably supports its 'quality' thesis. I'll keep an eye on this one for sure!

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