3 days ago
Work is under way to turn this firm around – optimists could cash in
Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Micro-cap stocks are not for everyone and risk-intolerant investors can look away now, especially if they remember this column's past misadventures in this area with stocks such as Xaar (XAR), the now-renamed Chesterfield Special Cylinders (CSC:AIM), or Pressure Technologies, as was, and the now-delisted Zytronic.
But one of our more successful forays here was wallpaper-to-fabrics group Sanderson Design (SDG:AIM), where we more than doubled our money and then took profits north of 200p.
A subsequent lengthy slide in the share price catches our eye, not least as it leaves the stock trading very cheaply indeed relative to current net assets, let alone any earnings figure that represents anything like a return to form for the company.
Once known as Walker Greenbank, Sanderson Design has a rich heritage and strong brands, which include Zoffany, Harlequin, Sanderson and Morris & Co, but the last three years have been ones to forget for the Chiswick-headquartered company.
Weak consumer confidence has dampened sales across its brand, manufacturing and licensing activities, while the company has invested heavily in digital marketing and production. Last year's £16.3m write-down of intangible assets relating to 2016's purchase of Clarke & Clarke took Sanderson into the red on a statutory basis and the dividend was cut.
Throw in April's tariff scares, thanks to President Trump's 'Liberation Day' trade agenda, and during spring, the share price hit lows not seen since Covid-19 was doing its worst in early 2020, and before that in 2010.
Chair Dianne Thompson and chief executive, Lisa Montague, are working on a cost-cutting programme, driven by an efficiency drive called Future Factory, where digitisation has a key role.
Efforts to enhance sales in the US could yet bear fruit, even if the impact of tariffs must still be closely monitored, and the power of the company's brands can be seen in the licensing income they generate through agreements such as those struck with Next and Sainsbury's.
In the meantime, Sanderson ended its last financial year in January with £5.8m in cash and no debt. Adjust that figure for a pension surplus and lease liabilities, and net borrowing is limited, so there is no clock ticking away in the background, and this month's trading statement reveals the cash pile is now £7.5m.
The lowly valuation attributed to the company further protects the downside. The stock market capitalisation of £36m compares to tangible net assets on the balance sheet as of the January year-end of £57.5m, or just under 80p a share. If momentums return to the business – and it does remain an 'if' – that level is the very least we would expect of the share price.
This is also a business that has been capable of making £5m to £8m in net profit in solid years and more than £10m in really good ones, such as 2018. The £36m market valuation looks low against such figures, and any return to those levels would put the shares on a single-digit price-to-earnings multiple.
We must be aware of the risks posed by the mixed, if not downright confusing, macroeconomic backdrop, and how it is never as easy as it looks to really crack the US market – even if management believes it can be done.
Moreover, any brave buyer of the shares will need a positive catalyst of some kind to persuade others to start thinking their way. The trading update was far from strong, as it flagged a 4pc drop in sales for the first six months of the financial year to January 2026.
However, licensing income was strong, brand revenues showed some signs of stabilisation, and the cost cuts were sufficient to prompt management to reiterate their belief that it would improve to a break-even result this time around, after last year's loss.
In sum, the Board did not have to disgorge a profit warning. Sometimes all it takes with heavily beaten down stocks is for the rate of decline in sales and profits to slow, especially if management is acting and the balance sheet offers support, as seems to be the case here.
Investors then start to think that if a bottom may be in sight, then things will stop getting worse, and that if things stop getting worse, then they may soon get better.
Such a thought process, backed up in time by improved profits and cash flow, could just be the catalyst that patient contrarians will seek as they do their research and weigh up the chances of a recovery in Sanderson Design's shares.
We now wait to see the first-half results on October 15.
