- Profit guidance downgraded
- Hospitality markets ‘remain subdued’
- Budget to impact cost base
Ceramic products specialist Churchill China (CHH:AIM) has a well-deserved reputation for its cash generation and resilience and for making statesmanlike progress in overseas markets.
But shares in the Stoke-on-trent-based outfit slumped 20% to a five-year low of 650p today (20 November) on a warning annual profits will be ‘materially below’ market expectations.
Churchill China pinned the blame for the earnings alert on global hospitality markets which remain subdued as well as this year’s absence of the typical seasonal uptick in fourth quarter order ahead of Christmas.
In addition, the company downgraded its profit outlook for 2025 due to the recent UK Budget, which has introduced extra demand and cost headwinds into the mix.
CRACKS BEGIN TO SHOW
Churchill China said revenue in the year to September 2024 fell short of expectations, yet the company stressed that its ‘strong operational performance’ has mitigated the impact on profitability.
The company warned softness in its key hospitality markets will continue into 2025, ‘driven by the effects of the UK Budget and political uncertainty in some key European markets’. The recent Budget will have implications for its cost base and hit profitability in 2025, though the firm will look to offset these cost pressures through efficiency measures and price hikes.
Despite these near-term challenges, Churchill China insisted this situation ‘does not change the fundamentals of our business. We have high-quality differentiated products with significant growth potential as markets recover, particularly where we currently have low market share. All of which is backed by solid financials of operational cash generation and a strong unencumbered balance sheet.’
THE INVESTEC VIEW
Following the update, Investec analyst Matthew Webb downgraded his year-to-December 2024 sales forecast from £86 million to £78.5 million and his pre-tax profit forecast from £10.8 million to £8.5 million.
‘The downgrade comes from both the UK and Europe,’ explained Webb. ‘In the UK, trading was already weak in October, particularly in the (more profitable) independent sector, with the national accounts holding up better. Trading has deteriorated further since the UK Budget on 30 October, given the additional costs imposed on the hospitality sector. In Europe, there has been no improvement in the negative trends reported in H1, particularly in Germany.’
Webb added that Churchill China is ‘rightly’ taking a cautious view on the full year 2025 outlook, and is assuming broadly flat revenue and profit versus his new 2024 forecasts. ‘We expect some recovery in full year 2026,’ added Webb, ‘but the timing is obviously uncertain.’
