Lights dim at FW Thorpe

Lighting system manufacturer, FW Thorpe has grown steadily in recent years, but that growth is likely to moderate according to its chairman and co-chief executive.

At the end of the financial year in June FW Thorpe reported 5% growth in revenues, a fraction higher than its recent compound annual growth rate but Andrew Thorpe, grandson of the company's founder, was disappointed, it had looked as though the company would do better.

In an update last November, the company resigned itself to a "more moderate" sales performance, at least for a while.

Two factors may be weighing on Thorpe, the long-awaited effect of public sector spending constraints, and a slow-down in the adoption of LED systems, which are often more expensive but longer lasting and more energy efficient than the traditional fluorescent lighting used in factories and shops.

Thorpe has many of the attributes of a hidden champion. It is a niche manufacturing business that has invested heavily in LED technology, requiring technical expertise.  It's debt-free, owns its own premises and it's still controlled by the Thorpe family, who own the majority of the shares. These qualities give it strength, against competition, and to continue investing through difficult times even if that reduces profit in the short term. They make Thorpe worth hanging on to, even though demand for lighting systems is likely to be subdued.

In one respect Thorpe fails to meet the criteria for a hidden champion, though. It's not global. Most of its revenues come from the UK, so it's more vulnerable to conditions in its home market. For one reason or another it's yet to mine its niche abroad, where potential competitors abound.

For now, its diversifying into outdoor lighting through the acquisition of Portland Lighting, which supplies shops and breweries with sign lighting, and through its investment in TRT, a spinoff from its main Thorlux company, that will initially specialise in making LED lights for roads and tunnels.

Though its disappointing that sales growth is slowing, it may not be surprising that in times of austerity companies and public sector organisations are less likely to upgrade lighting systems to a new technology. Indeed fluorescent lighting, which Thorpe still provides, is also advancing. 

I'm not in a hurry to eject FW Thorpe from the Share Sleuth portfolio. It's a strong, conservatively managed business, and the price is fair:

[spreadsheet]

This is where I have placed it to in the portfolio matrix: 

Companies further to the right, and the bottom, are closer to being sold.