Welcome to my stock journal. I hope to improve as an investor by publishing research notes here. Today, I’m taking a closer look at Churchill China.
Churchill China (LON:CHH) dates back to 1795 and has been making earthenware in Stoke-on-Trent ever since. Earthenware is pottery that has not been fired to the point of vitrification and is therefore rougher in texture and more porous compared to porcelain or other stoneware. Churchill sells more than 3,000 different products and continues to develop new ones in response to food and design trends.
Churchill primarily sells its wares to hospitality businesses (and has done so since 1980), but also has a small retail division. The latter is in decline as management chooses to focus on the more profitable hospitality market. Retail sales are now so small that the company stopped reporting them separately in 2018.
The strength of the Churchill brand is underscored by its “five year edge chip warranty” offered on certain products. Commercial kitchens are hostile environments for ceramics and so this promise carries weight.
A key benefit of serving the hospitality sector is that restaurants rarely change crockery suppliers. When a restaurant launches it invests a large amount of money in a complete set of crockery and any subsequent breakages are very likely to be replaced from the same supplier.
Churchill has been the leading supplier of crockery to the UK hospitality industry since 2001 but more recently has been successfully pursuing international expansion, particularly in Europe. Management claims that it still only holds a relatively small share of the European market and so the region offers a long growth runway. Meanwhile, UK total sales have stagnated as a result of the decline in retail as can be seen in the chart below .
In 2019, the company acquired the remaining 54% of one of its materials suppliers, Furlong Mills Ltd, for net cash of £2.9 million. Furlong is another Stoke-on-Trent company with a long history dating back to 1842. Management says that one rationale for the acquisition was to help Churchill continue to differentiate its products through integrating Furlong’s material science expertise. In the chart above, the roughly £5 million bump up in UK sales in 2019 is related to this acquisition.
Focus on the more profitable hospitality market has resulted in improving…
