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Hardman & Co

Warpaint London Plc Trading update: softening UK market

Hardman & Co Report Report DownloadsWarpaint London Plc (LON:W7L) has released a trading update for the year ending 31 December 2018.
The company has prudently signalled that group sales for FY2018 are likely to be
lower than previously indicated, in the range of £48m-£52m, with adjusted PBT of
£8.5m-£10m. The company says that trading conditions in the UK remain
challenging but that it has seen strong growth in its overseas markets. The share
price responded negatively to this trading announcement, plunging by over 45%
to 112.5p on the day, from the 206.5p closing price on 26 October. We have
lowered FY18E revenue to £50.0m, from £55.1m, with adjusted PBT of £9.1m,
from £12.4m, but we retain a dividend forecast of 5.5p.

UK trading conditions: During the interim results announcement in September,
Warpaint stated that “trading conditions in the UK remain challenging, because
of the UK high-street slowdown and ongoing Brexit anxiety.” The company has
seen a further softening in the past six weeks, with retailers reducing stock
levels and delaying Christmas orders.
International operations: Given the weak retail market in the UK, Warpaint’s
management has been putting specific emphasis on its international operations.
Benefiting from the recent acquisition of Leeds Marketing, Warpaint saw a 60%
increase in group sales in the US for the nine-month period to end-September
2018. The company has also reported its first sales to mainland China, as well
as to Russia.
Valuation: Despite the reduction in revenue and PBT forecasts highlighted
above, Warpaint will still be profitable for FY18. With a strong cash position,
the management team still intends to pay off the remaining borrowings. The
company remains profitable and cash-generative, and it intends to maintain its
progressive dividend policy.
Risks: As shown in this trading update, Warpaint’s success depends partly on
the growth in the discount retail sector. Following the acquisition of Retra,
which has significant exposure to the gifting market, Warpaint has better
visibility in revenue forecasting, but Retra also increases its exposure to the
struggling UK high-street retailers.
► Investment summary: Warpaint is benefiting from its two acquisitions, Retra
and Leeds Marketing, which enable the group to enter the fastest-growing
colour cosmetics market (China) and further expand into the largest colour
cosmetics market (US) in the world. It offers investors the opportunity to invest
in the fast-growing colour cosmetics sector, with a highly experienced
management team, an attractive RoE and a high dividend yield.

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