Stock In Focus: Laura Ashley Is Dressed For Success

14th Oct '15 by Roland Head

27 comments 21589 reads

Strong cash flow, a high dividend yield, a premium brand name and a bargain share price. What’s not to like? In the case of Laura Ashley, the market seems to have dumped the stock into the too good to be true category. Despite years of consistent performance, firm is valued at a discount to most of its UK-listed peers.

I’m not convinced this view is correct. UK trading is strong and I believe the firm’s Asian expansion has some way to go. Indeed, Laura Ashley is on my own watch list and at current levels I’m seriously considering a buy. Stockopedia likes the firm too -- it has a StockRank of 95.

Recent price falls have taken Laura Ashley shares back to levels last seen in March. I’ve taken a closer look at the company to find out whether the numbers really stack up. Are recent price falls offering investors a second bite of the cherry?

Understanding the business

The Laura Ashley business has three main elements. A 198-store chain of shops in the UK, 296 franchised international stores and a manufacturing operation. The firm also trades online and has a small but fast-growing hotel business in the UK.

Laura Ashley’s readily-recognisable style has always worked well with aspirational buyers in the UK and overseas.

In more recent years, it’s become clear that Asia is one of the key growth opportunities for the firm. It already has successful franchised operations in countries such as Malaysia, Hong Kong and Japan. Crucially, however, Laura Ashley does not yet have a presence in Asia’s two largest economies, China and India.

Any remaining doubt about Laura Ashley’s commitment to Asian growth was quashed in June, when the firm spent £31.1m on a Singapore building for its new Asian headquarters and said it had identified “significant growth prospects” in Asia.

The move surprised the market but as Stockopedia’s Paul Scott explained, it does appear to be both above board and logical.

Screening for value

Value investors might want to note that Laura Ashley qualifies for two of Stockopedia’s top-performing value screens, the David Dreman Low PE and High Yield screens. These screens have delivered an average annualised return of 21% since their inception.

Interestingly, Laura Ashley qualified for both screens in April 2015, at a time when the firm’s share price was 29p, slightly above the current price…

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underscored

15th Oct '15

Well growth is not priced into this share, so if it fails to grow it is not going to get de-rated is it!

Rusty2

I do hold some shares. I bought just before the building in Singapore was announced, since then the share has fallen around 10%, I think this amount of money spend on a building has put some investors off. I understand Singapore property have gone quite a lot recently but is declining now and with China economy in decline I think it could be a risky move. So the elephant in the room for me is tying up about £40m up in a building and possible recession in Asia. I will continue to hold and hope Paul is correct.

kevanp

Property in Singapore will never be a bad investment. Full stop. When I lived there 40 years ago everyone thought the property market looked like a bubble, walked like a bubble, and quacked like a bubble. And you know what? It wasn't a bubble. How I wish I'd bought something then‚ anything — residential, retail, industrial.

Of course there will be short term declines. It's a market. The Chinese play a long game. And they believe that you can never go wrong owning property. I've yet to see any evidence they're wrong. Singapore is, effectively, Chinese.

I agree that the strategy of a retail brand becoming a property company are, at the very least, open to debate. Perhaps Paul, with his background, has some thoughts about companies over the years whose primary business has nothing to do with property, but whose financial success has been based ultimately on the performance of their property holdings.

Well property in the long term maybe a reasonable investment but prices did fall about 40% in the mid to late 90s and took about 10 years to recover. Now it looks like property has peaked about 2 years ago and is declining. With China going into recession I feel this is poor timing. I think they should either have bought a smaller property or leased one until the Asian expansion took off. Tieing up 2 years profits in a building does not make sense to me. Looking at staff reviews on Glassdoor does not encourage me, seems many are on minimum wage so the living wage will hit them?

marben100

Definitely an interesting proposition... though a little puzzling that the company chooses to pay out so much of annual profits and cashflow as a dividend. I do wonder whether that will be sustained?

On researching it further I was surprised to learn that the company is, essentially, Malaysian owned and run largely by Far Eastern board members (both executive and non-executive). One always thinks of Laura Ashley as quintessentially English! It looks like some 60% of the shares are controlled by the chairman and other board members.

I am inclined to dip a toe in the water here but wouldn't want too much exposure in light of the risks of being a minority shareholder in such a situation. I might feel more comfortable once I have met the Board.

Cheers,

Mark
Twitter @marben100

janebolacha

Whatever one thinks of Laura Ashley as a business in itself (and I've already expressed my own doubts in response to previous threads on this site), an investor ought, imo, to be asking serious questions about this property purchase in Singapore, 35m pounds including costs and property tax and thus a major component of the company's balance sheet, and in particular on its timing. There is already a property price downturn in Singapore and office rental rates are falling. There is an enormous amount of office space due to hit the market in 2016, an amount already equivalent to several years' demand for new space. This can be seen very clearly in the Urban Redevelopment Authority's official figures (office space section about halfway down):

http://www.ura.gov.sg/uol/media-room/news/2015/jul/pr15-39.aspx

Even if the space is somehow rented our in its entirety in an over-supplied market, the yield will be low, almost certainly some way below 5%. Yes, in time (but how much time? over how many years?), property in Singapore is likely to continue to be a safe investment but is it, for a company like ALY, a good investment or even a very profitable or wise one, compared to the flexibility of renting, or even actually is it a good use of funds?

It's being said that the purchase of this property was somehow to become the impetus for business expansion into China and the rest of Asia. Sorry but I just don't get that, why do you have to spend 35m pounds in this way in order to expand a franchising business in Asia? To me, this raises questions about the competence of management and their decision-making.

The other consideration on timing is, of course, that the Chinese market for middle-class aspirational products from Europe is certainly slowing. The recent results from Burberry give some evidence of the effect of that.

I've also expressed in previous posts my personal doubts about the ability of MUIB, the controlling shareholder, to carry through and succeed in their chosen strategy. Laura Ashley's annual group turnover, going back some 25 years and through all kinds of management and strategy twists and turns, has hardly moved from the 250m-350m pounds range. MUIB, with all due respect to them, do not strike me as being at all a dynamic powerhouse of ideas who will be able to transform Laura Ashley, whatever its touted potential may be. The Singapore property purchase does nothing to make me think otherwise.

All in all, I continue to find the investment case unconvincing, except possibly as a trading opportunity given how far the SP has already fallen.

Roland Head

herbie47,

I'm not sure that China is falling into recession. The GDP growth rate is slowing but is still expected to be 5-6% this year, I believe. A rate that most western economies would kill for.

I'm not an expert on the Singapore property market, but if it really did peak two years ago, then now may not be too bad a time to buy. After all, anyone who bought decent property in London before the financial crisis is now comfortably in profit.

Cheers, Roland

kevanp,

I tend to agree re. Singapore property.

I lived in Singapore in the 1980s, and while I was too young to buy property, I was old enough to see that housing and commercial property was being developed as fast as possible, including on some of the earliest reclaimed land.

I left in 1990, but from what I understand, things haven't slowed down that much over the last 20 years. Certainly the population has continued to grow steadily, as has the economy.

One point I would make in this case is that two-thirds of the property was paid for with cash. Laura Ashley Holdings (LON:ALY) has a lot of equity in the building. Debt costs should be low and unless the building is really badly located or falling down, I'd imagine it shouldn't be too difficult to sell (or perhaps sell and leaseback) if needed.

Regards, Roland

Hi janebolacha,

Thanks for your lengthy comment. I do share some of your reservations, but would add a few observations.

The trading update from Burberry (LON:BRBY) this morning stopped just short of being a profit warning, but a 6% decline in Asian sales wasn't great news. However, this is coming off the back of strong growth in recent years. Laura Ashley is also a bit more affordable than Burberry. My impression from a recent trip abroad (based on tourist counts) is that there is still a lot of new money in China looking to get spent.

As for the ability of the controlling shareholder to drive growth, I guess we'll have to see. I'm not familiar with the other business interests of MUIB, but they should at least be well placed to understand the Asian market and drive a low-cost franchised growth model.

I do recognise the points you and others have made about a property slowdown in Singapore and the disproportionate value of this asset compared to the size of the company.

On the other hand, I think it's fair to say that the controlling shareholders, who are just a few miles away from Singapore in Malaysia, may (should) have a better feel for property market conditions than we do. The firm doesn't have many other assets and did have a large cash balance.

I appreciate your comments, it takes two sides to make a market.

Regards, Roland

Really, you believe the figures? I see Renishaw (LON:RSW) trading update says their Far East revenues are down, there have been many other reports about falling sales (German cars). Did they not just report fall in imports, yes I see 20% fall, that is massive?

Singapore property has fallen but not by that much maybe 5% so certainly has not crashed yet, but if you look back to the Asia crisis it did fall quite a lot then, even more reason to be leasing now until the Asia operation has taken off. Singapore is in deflation and has been for some months.

Hi Mark,

Thanks for your comments. I should perhaps have explained the ownership structure of Laura Ashley Holdings (LON:ALY) in the article, as it won't be everyone's cup of tea.

On the other hand, juding from UK retail performance, the board does seem to have a good understanding of the core appeal of Laura Ashley -- or perhaps they employ people who do, and are allowed to work unimpeded.

If you ever do manage to meet the management, it would be very interesting to hear your views.

Cheers,

Roland

Roland,

No, I do my own research and don't assume that simply because the controlling shareholder happens to be Malaysian-owned and based in Kuala Lumpur means they should "be well placed to understand the Asian market and drive a low-cost franchised growth model", Why? The Chinese market (which is what we are essentially talking about) is bound to be very different from that in Malaysia or Singapore or Korea or elsewhere. MUIB, not a major group anyway (shareholder funds, according to their website, of only about 115m pounds), seems to have nothing substantial in China and no experience of franchising apart from Laura Ashley itself. If they had known about the Chinese market, tbh, they would not have been leaving it until now to go into that market in a serious way, they'd have been in there several years ago!

As for the Singapore property market, the official figures on prices and rentals and projects under way are there from their government's website. Is it " fair to say that the controlling shareholders, who are just a few miles away from Singapore in Malaysia, may (should) have a better feel for property market conditions than we do"? No, it isn't. I don't invest on the basis of assumptions of that kind when there is nothing to support them but instead clearly an impending property overhang.

As for the Chinese upper-end aspirational goods market, it isn't only Burberry who are reporting slower growth. Many companies in the aspirational goods sector are reporting similar trading conditions, as amply reported on websites and in the media.

Best of luck with your investing,
Jane.

Jane,

My assumption that MUIB's local knowledge is superior to yours or mine may have been slightly glib. However, with respect, I do believe they (and their local advisers) may know more about conditions in the Singapore property market than you or I.

I've taken a look at the link you included in your original comment (http://www.ura.gov.sg/uol/media-room/news/2015/jul/pr15-39.aspx) and to be honest, the situation doesn't seem that bad:

- Although there is a large amount of new office space due to hit the market next year, this is expected to fall off sharply in subsequent years. Vacancy rates have been fairly stable for the last couple of years, but were higher a few years ago, despite property prices and rents being lower at that time.
- Commercial property prices appear to be fairly flat and do not seem to be crashing.
- Rental rates have tailed off slightly but are above 2013/14 levels.

Of course, these are market averages. We don't know exactly how the Laura Ashley building will fit into this picture, but from looking at the RNS and Google Maps, it appears to be a modern office block in an area that's being steadily redeveloped and is close to Changi Airport. It's not a vanity location in the City centre.

I agree that the jury is still out on the wisdom of this purchase and the financial returns it will generate. But I don't think there's any obvious reason to assume it will be a disaster.

As regards expansion into China, who knows why Laura Ashley didn't do it two years ago? However, it certainly cannot have been because they didn't know about the potential opportunity. It may be that they decided to focus on smaller countries first. This appears to have had reasonable success, overall.

Regards,

Roland

Velo

I've been in ALY all year. And yes the recent divi was very, very, nice indeed. Also the SP doesn't seem to suffer too badly when it's classed as seriously under rated.

However, this several months decline in the SP can have an unduly amount of blame placed on the purchase of the HO property deal. For a company with a MCap of sub £200m spending the equivalent of 15% of that MCap on a new swanky HO property is simply unwarranted and ridiculous waste (unless someone tells me the company is now entering into property speculation. Are they a top FTSE100 big hitter or something? Why, why spend that much on a redundant asset?

Remember Woolworths? (aka owned by Kingfisher in it's later years) used to have a predilection for buying their High Street stores rather than renting.
After almost a century of following that policy, by sheer accident they were gobsmacked to be told in the 1980's by Kingfisher (Was Cosa Nostra or some such before name-change) takeover team that now owned them that Woolworths were effectively the 8th largest property company in the UK! (Kingfisher immediately set about remedying that fact by embarked on a wholesale sale and leaseback program).

So buying their own retail outlets paid off big time. Can ALY promise similar reasons for such wasteful expense? - Or is it a case of someone on an ego trip? Couldn't they have made do with a bigger office table?

Whilst on the 80's - anyone remember the grand daddy of the forerunner of all TV reality programmes - the great Sir John Harvey-Jones of "The Troubleshooter"?

He'd walk into a failing business then do a "Mentalist" on the failing company (Morgan motor co, Triang etc., etc.,) left expert analysis guidance for the usually ungrateful truculent owners to implement (who'd run the business into the ground in the first place) after which the programme returned to see how they fared. Those who followed Sir Harvey's guidelines succeeded; those who didn't went nowhere fast.

Needless to say Sir Harvey-Jones was a revelation and a worldwide hit (think he was ex ICI chairman).

One thing he said in an almost throwaway line has stuck with me ever since in it's simplicity. And it's fitting for ALY.

In one visit he took his time in the entrance foyer of a swanky HO of a failing company by interviewing the florist attending the profuse vases of flowers in the foyer entrance (water fountains, etc.,) He turns to the camera and said words to the effect "I always find that a company not in control of its finances almost always has totally unnecessary expensive flowers and adornements in the entrance. A potential indicator of a lack of expense control.

I'm thinking of that when I think of that £31m (eqiv of 15% spend of MCAP) new HO purchase by ALY.

Does anyone seriously think that huge amount spent on a Head Office by a SMALL cap company was really necessary?
Really, anyone?
It's that single act that has had a huge and significant impact on the SP decline. It speaks volumes.

pdrevers

I'd like to comment on Laura Ashley's international expansion plans.

Whilst I understand that the owners of the Company are Asian, and therefore maybe have some natural affinity with the Asian and Chinese markets, and whilst I cannot argue that, if done properly, and over time, the Chinese market should be potential big for the Company, I am amazed that Laura Ashley continues to ignore the biggest consumer market in the world which is the USA.

Many many UK retail companies have suffered in the USA, and the British Press has been merciless "Yet another British Retail fails in the USA" but the US retail market is, continues to be, and will be so for a long time, the biggest consumer market in the world

I was the person who introduced Laura Ashley into the USA in 1974, opening it's first shop in San Francisco. By the time I left in 1990 we had opened over 200 stores, we had a business over $400 million per annum, and contributed more than half the global profits of the company.

Subsequent years in the US were a disaster, and currently there are NO retail stores in the USA. The brand is diminishing by the day in the US, the older persons who made it successful in the early years are slowly dyeing out, whereas the younger generations, especially the Millennials have never heard of the Laura Ashley name.

I do not understand why Laura Ashley does not re-introduce the Brand into the USA, the potential for success here is much bigger in the short, medium term than that offered by China

Peter D. Revers
Ex CEO Laura Ashley USA

Ramridge

16th Oct '15

Hi Peter -
Reading your post, I get the impression that you built the USA operation in the period 70s-90s to a roaring success, but then it fell off the cliff as soon as you left.
I would be genuinely interested to hear your view as to why this happened. As the great Santayana said, "those who fail to learn from history are doomed to repeat it."
Cheers, Ram

Ramridge, you might find this paper of interest:

https://www.blackwellpublishing.com/KOLB/downloads/private/grant/lauraashley.pdf#sthash.R01KAusg.dpuf

It gives one account (I believe from an academic research viewpoint) of Laura Ashley's management upheavals and strategy changes in the 1990's, prior to MUIB becoming involved in 1998.

(PS: This paper was found in an internet search, it's not one in which I had any personal involvement)

Lepep

Sorry do not have time to do analysis at present so would like to know if anyone knows last 5 years:
1.growth of sales and dividend per share.
2.Is current CEO's remuneration and or bonus tied to those indicators
3.Debt to Equity ratio

Hello Ramridge:
Thank you for your interest, and yes your first paragraph is correct - I'm creating a reply which I'll post shortly
regards
Peter

17th Oct '15

Hi Jane:
Thanks for this link - I had not seen this before - the history through 1990 is substantially correct with some inaccuracies and omissions. I cannot, of course speak for events after 1990 other than as an observer
Regards
Peter Revers

Stock in Focus: Laura Ashley is dressed for success

Understanding the business

Screening for value

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Roland Head

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