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Plenty in the tank as Christie hits the expansion trail

Last updated: 15:41 21 Apr 2016 BST, First published: 10:41 21 Apr 2016 BST

stocktake
The stocktaking business is recovering from a difficult year.

Business services provider Christie Group (LON:CTG) has set itself an ambitious long term target.

That is to haul the business back to the level of profitability seen before the financial crisis.

At that point Christie’s existing divisions were generating annual operating profits of £10m, while paying a chunky 4.25p a share dividend.

To get to this point the firm, which is headquartered not far from London’s Fleet Street, would have to more than double its current earnings. It would also mean adding a further 1.75p a share to the payout.

So, the target is an ambitious one.

Christie splits into two distinct operations. Professional Business Services (PBS) comprises Christie & Co, an adviser to the hospitality, leisure, retail and care sectors, Christie Finance, Christie Insurance and business appraisal firm Pinders.

Its Stock and Inventory Systems & Services (SISS) division fairly much does what it says on the tin.

It owns two of the longest-established names in stocktaking: retail specialist Orridge, and Venners, which is big in hospitality. In there too is a potential little gem called Vennersys, a growing e-ticketing and admissions firm. 

Annual results tell a tale of a company in transition. Revenues grew by 4.5% to almost £64m, while operating profits were more or less static at £3.8m.

PBS made the lion’s share of those earnings. Management, led by Chief Executive David Rugg, was heartened by the performance of the operation and in particular the revenues mix last year.

The stellar contribution from the hospitality arm, driven by merger and acquisition activity in the hotel sector, skewed results in 2014.

The SISS division, which is more labour intensive, has been hit in the UK retail stocktaking operation by increases to the minimum wage, the introduction of the living wage and pension auto-enrolment.

Things haven’t been helped by food price deflation, which is prevalent across the grocery industry.

“We’ve had to re-negotiate pricing with customers,” reveals Rugg. “I think what we will eventually end up with is a slightly smaller, but profitable business.”

He believes the role played by businesses such as Orridge and Venners will increase over the longer-term as click-and-collect becomes more widespread. Retailers, he says, will have to manage stock levels more precisely.

“You can’t afford to disappoint a customer who comes into the store to pick up an item he or she has ordered over the internet the night before,” Rugg explains.

“So, the shop owner needs to know what’s physically in the supply chain rather than what the electronic records say. This requires very accurate stock files.”

To rebuild profits, Christie has been investing in growth. This includes hiring new, fee-generating personnel for the PBS business.

But, as chief financial ffficer Dan Prickett points out, there can be a lag between appointing these potential rain-makers and them making a meaningful contribution to sales. That means the fruit of this year’s investment might not be seen until 2017.

At the same time the group has spent heavily on its technology, overhauling its web sites in Christie & Co, Christie Finance and Christie Insurance at a one-off cost of around £500,000.

Part of the tech upgrade has also seen Christie move its Vennersys operation to the cloud. The business is interesting, growing and possibly the sleeper in the portfolio.

It provides electronic ticketing and sales services to smaller attractions such as Folly Farm in West Wales, the Avro Heritage Museum in Stockport and Strawberry Hill in Twickenham, London.

It takes a percentage of the revenues booked using its system. So, Vennersys’s income stream will increase as the number of visitors signing up electronically begins to rise. As it is active in the leisure sector already it is generating sales leads all the time for the system.

Christie is a cyclical business and past evidence suggests it is nowhere near the top of this particular upswing in revenues and profits. But before we assess the company’s prospects, it is perhaps worth looking at potential drags on performance.

One is the final salary pension deficit, which, at £12m, is described by CFO Prickett as “a nuisance caused by the realities of the low gilt yield environment but one that doesn’t in any way reflect underlying trading”.

Having a deficit means it must make payments to meet the shortfall even though a relatively modest rise in gilt yields would fill this black hole.

The Brexit issue has also loomed large, with some clients deferring spending decisions until the in-out referendum finally decides the UK’s fate in Europe. The impact should be neutral, and CEO Rugg anticipates activity will pick up thereafter.

The company’s broker, Panmure Gordon, is predicting profits before tax and amortisation will advance to £4.2m this year, then to £4.9m and £5.9m in 2018.

Christie’s shares currently trade on around 13 times forward earnings, which means the stock is sitting at a discount to what analysts see as its ‘natural valuation’ of 16-18 times.

In fact, there is even an argument to say the firm is worth around a year’s turnover, or double its current market capitalisation. 

That may be a little ambitious. Panmure reckons Christie is worth 165p, which is well ahead of the current 120p share price.

Analyst Michael Donnelly says: “We believe that the current discount to the wider market is unwarranted.”

 

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