VALUE INVESTING
Churchill China

By Stephen Bland (TMFPyad)
June 8, 2001

A definite tinpot company, or maybe china pot in this case, nevertheless Churchill (LSE: CHH) (www.churchillchina.com) is a pyad share in all but size. Here are the fundamentals:

• Share price 180p
• 52 week high/low 203p/158p
• 5 year high/low 715p/62p
• Market cap £19m
• Earnings per share y/e 31/12/00 (normalised) 18.0p
• Forecast earnings per share y/e 31/12/01 24.6p
• Forecast eps y/e 31/12/02 27.9p
• Price/earnings ratio historical 10.0; on 01 forecast 7.3; on 02 forecast 6.5
• Yield on historical dividend 3.9%; on 01 forecast 5.0%
• Price/tangible book 0.8
• Gearing -4%, equivalent to net cash of £1m
• One year relative strength +77%
• Directors own 18.2%, other majors including family 35%

This is one of those companies that has undergone a reorganisation in recent years. You can see from the above five year price range that it was at one time trading at over 700p but that was back in 1997.  Earnings per share collapsed from about 40p in 1996 down to 1p in 1999. Then it recovered dramatically in 2000 as shown above with the 36% increase forecast to 2001. The share price followed the earnings per share.

Directorspeak is reasonably positive and at the AGM in May the chairman commented that "the group has met growth targets and that trading is in line with expectations."

One interesting development is that the company has secured a licence for the Harry Potter character both from the books and the forthcoming film, but only for the UK and Ireland. This kind of thing can be something of a gamble: such character merchandise is notoriously fickle and there is little as out of date as yesterday's hot character.

One problem with the forecasts, and one that is typical of very small caps like this, is that there is only one broker making estimates and that is the house broker. Apart from this I draw readers' attention to what I believe to be the much greater risks of small caps in general when compared to larger companies.

By the way, don't be put off by the strong rise over the last year, during which the share price has trebled. I know that this kind of situation bothers some people, even rather surprisingly a few of the cynical old regulars on the value board. I believe it to be irrelevant to value investing. Ideally, it is true, I personally seek relative weakness but it is an extremely minor part of the value picture. I never let a strong previous rise put me off investing in the right share. What matters only is whether on the current price it is a value play. Forget earlier price action.

In a sense this attitude that needs to be cultivated is similar to the rule which says that once you have bought you more or less forget the cost price, and simply continually re-evaluate the share on its latest fundamentals, then be ready to sell the moment you moment you form the view that there is insufficient value left on your criteria to justify holding as a value share. Quite irrespective of whether you are showing a profit or a loss. Worrying about where the price was before you bought smacks of chartism, which does not sit well with value.

By the way, Churchill makes ceramic products for catering and households. But we don't worry too much about what the company actually does. That would be overanalysing.