Sanderson Design Group SDG

I want to start a thread on Sanderson Design Group. I have shares in this company. and have held them now for several years.

What used to be Walker greenback, they create coverings and furnishings for the home. They own a portfolio of brands and the jewel in the crown is probably Morris and Co.

Recent highlights:

new CEO who comes from a luxury goods background

Licensing deals with Next, National Trust

A move away from B2B and greater focus on selling direct to consumer

Recent ‘ahead of expectations’ guidance.

a revamp of all sub domains

The new websites for the Zoffany, Sanderson, Morris & Co., Harlequin, Scion, Anthology and Clarke & Clarke brands can all be accessed via the corporate site www.sandersondesigngroup.com. These new websites are in line with the Company’s strategy of elevating its brands, thereby creating an engaging experience for consumers and driving sales to trade customers.

Each website underlines the individuality of the brand, providing images, sampling and other product information to inspire consumers. The site addresses are listed here:

· Zoffany: https://zoffany.sandersondesigngroup.com/

· Sanderson: https://sanderson.sandersondesigngroup.com/

· Morris & Co: https://morrisandco.sandersondesigngroup.com/

· Harlequin: https://harlequin.sandersondesigngroup.com/

· Scion: https://scion.sandersondesigngroup.com/

· Anthology: https://anthology.sandersondesigngroup.com/

· Clarke & Clarke: https://clarke-clarke.sandersondesigngroup.com/

cost savings initiatives introduced. which could help bottom line

Licensing revenue equally have a geared effect on sales.

“With the Morris & Co brand, NEXT will produce apparel, including womenswear, men’s shirts and childrenswear, with an anticipated launch date of June 2021.

With the Sanderson and Sanderson Home brands, NEXT will produce an exciting range of homeware. These products are expected to be launched following the Morris & Co apparel launch.”

FORECASTS

£ millions unless stated

Year 2021 2022 2023
Turnover 95.0 -14.8% 102.9 8.4% 111.8 8.6%
EBITDA 13.2 0.4% 13.0 -1.1% 14.5 11.1%
EBIT 6.8 -1.6% 6.6 -2.7% 7.9 19.8%
Pre-tax profit 6.4 1.1% 6.4 -0.8% 7.7 20.8%
Post-tax profit 5.3 -19.3% 5.2 -1.9% 6.3 21.2%
EPS § 7.3 -20.7% 7.2 -1.4% 8.7 20.8%
Dividend § - 2.1 2.7 28.6%

historically operating margin was high single digits, and even peaked in 2017 and 2018 to 10.7% of turnover
image

if we assume the new initiatives can cause an increase in margins and work on the forecast turnover figures we get

2022 = £102.9m 11m op profit

2023 = £111.8m 11.9m op profit

divide by shares in issue (71m)

2022 £1.54

2023 £1.67

come at it another way. look at historical earnings breakdown, last 5 years.

for this year f/c is 7.3p EPS. Company has announced it is ahead: On 21 Jan said *“*This performance in both brand product sales and manufacturing has resulted in revenues being ahead of Board expectations and which, owing to the Group’s operational gearing and the cost savings already implemented, has translated largely into profit. The Board now expects profit before tax for the year ending 31 January 2021 to be not less than £6.3 million.

take that £6.3m and divide by 71m shares = 0.088p (9p rounded)

say they beat on this, as the wording is at least, so add on another ~10% = 9.8p and split that fairly arbitrarily, for sake of argument through the two haves of the 2021 year (4.8p H1 and 5p H2 [ i know this isn’t correct but for sake of argument])

put the 9.8p on a growth PE of say 17 and I derive a target of £1.67, above today’s £1.08p

Extrapolate a further year out and assume H1 grows by an average of the previous 2 years and H2 at the same rate as for former year . This gives me (H1 5.1p EPS and H2 7.8 EPS) or 2022 fc 12.7p again on a 17 times rating I get £2.15p

I know my workings are rudimentary and ignore a raft of other data, but just trying to throw up some potential scenarios for discussion.

I have tried to come at this from a few simplistic modelling directions to try and give a view the share price could be materially undervalued given the step changes in train in strategy, and the announcements they are ahead of forecasts

Sorry it is a rushed post. I will try and refine over time, but wnated to get something up quick to kick off discussion. Comments, thoughts and contributions are welcomed

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Hi Richard,

Many thanks for the write up. Never looked at Sanderson before, and so had a very quick skim of the 2020 accounts.

Income statement shows significant net other income…

… which turns out to be from the “sale of marketing materials and additional services”:

Are you able to shed any light on this income? Seems an important profit contributor for what is reported as a ‘side income’.

Cash flow reveals some notable pension-scheme entries:

Part/all of the pension charges are excluded from adjusted earnings…

…which arguably flatters reported profits as SDG is paying c£1.9m a year into the fund (which rises to £2.2m for the 2021 accounts) and these contributions are not charged against reported earnings (basic or adjusted).

My reading of the scheme indicates a £2m/yr contribution is adequate given the fund’s £1.6m/yr income and benefits paid now surpassing £3m/yr.

But I think some profit/valuation adjustments have to be made for the £2m/yr being injected into the scheme.

That’s it for now! Will wait to see if others chip in.

Maynard

Hello @MaynardPaton

Its grea to get a second take on things isn’t it. I have no understanding what ‘net other income’ includes. So thank you for flagging it. As you point out, the note states " sale of marketing materials and additional services to support the sale of the Group’s core products"

Sale of marketing maertials… Does this mean sample books or product range catalogues. I am inteigued and your question has spurred me on to contact the company and get some clarity. I will feedback.

And ‘Addiitional Services’ Whilst I am at it, I will see if I can understand this too. A great challenge and spot…

I am late to respond so will edit and add detail to your commentary further as and when I can.

But very grateful for the pointers you appear to have noted.

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Hello,

I’ve still to contact the company and get an understanding of the net income, I will do that, as I say ( I am curious) and will update as and when.

In meantime, I thought this post sums up a lot of the future direction and aspiration of the company: harnessing its brand poer to license new products. The Morris range is quite unique, and even I, someone who doesn’t really get into wrist watches, finds these quite appealing- quite pricey too!

So often people tout the line “oh, wallpaper” or “who would pay £150 for a roll of wallpaper” but the reality is the company is moving far beyond wallpaper with its ranges. It is being more ambitious, and as we all know, liscensing will offer much better margins. They just have to get it on the right products, and pitched correctly. But it seems the new CEO is quite focussed in this.

Edit: I have held these for over two years, so it is definitely not me following CockneyRebel into this trade!

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Interesting company, bought some of their products in the past, but never looked upon them as an investment, partly because I wasn’t really aware it was a public company.
Couple of points that struck me which may or may not be relevant in terms of their future plans and future business direction with branding etc.

If you look at their last 5 years, starting with 2016 – the revenue was £88M in 2016 and in 2020 it was £111M – Ok a growth of 26% over 5 years or over 5% a year approximately.

Then if you look at their costs of revenue it has grown from £31M to £43M (38%) in the same time frame and the selling and general admin has grown from £43M to £63M (46% growth).

Also in 2016 the company was virtually debt free and in 2020 that has grown to £10M.

On balance yes the company has grown, but at a price. The business doesn’t scale well, or the company has failed to get control of rising costs and its debt.
There maybe good reasons for all of this, but on the surface it looks like the company has to pedal and spend faster than it can grow its profitability in business.
The upshot over those 5 years (and I guess it would be better to take it over a much longer period) the net income has declined 37%, which is significant, whilst growing revenue and costs at a rapid pace.

Games

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SDG came to my attention approx 2 years ago when I ran a screen for potential value stocks, using a very simple criterion - PE <dividend yield (edited). Among others it picked up Plus500 and SDG. SDG was in serious decline, an ageing management team without ambition. The new chair seemed to be at odds with the CEO. The CEO was replaced and things started to move. Five years ago, this company was a very different beast

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@MaynardPaton an answer received on this question. The ~£5m net other income contribution is as I had guessed. A fuller anser is given below in the image.

" other income represents income we receive from retailers for use of our pattern books. … we have a pattern book club which retailers can join for a monthly fee which gives them access to benefits. These are as described marketing materials and cover most of the costs of producing pattern books for our business customers."

So actually I think this mkaes the figure reasoned but also quite stable and predictable.

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