I bought an an initial holding in Churchill China. This brought my total number of holdings to fifteen, my self-imposed limit, and meant I have little spare cash in the portfolio. I subsequently decided to sell AB Dynamics for a 9% loss. The price had faltered after my purchase.

Churchill China

Churchill China is a maker of ‘table-top products’ i.e. crockery, cutlery and glassware, predominantly for the catering industry. It is based in Stoke on Trent but exports its products worldwide. I have held it before and written about it here. However, that write-up was a bit brief and I think could do with updating.

Quality

I think Churchill China is a high quality business:

• Business economics: making plates is a fairly capital intensive business. Well, it’s more intensive than I usually like to go for. Churchill spends quite a bit on capex yet has consistently generated growth in revenue and profits from this and earns reasonable returns on capital (growing for the last few years to 19%). Churchill also earns fairly decent margins, again growing in recent years to 13%.
• Track record: Churchill’s track record is really good, particularly recently. It has been growing profits for the last few years at a compound rate of 20%. If you look back at its long term price graph it has been consistently growing for at least 10 years and was not even all that affected by the financial crisis. This points to a high quality defensive business.
• Competitive advantage: Churchill may benefit from some economies of scale, reputation and brand to some extent and customer relationships. I imagine the plate making market is fairly stable, fragmented and not liable to imminent disruption. However, it’s not obvious that Churchill has a particularly strong competitive advantage. It appears possibly vulnerable to cheaper competition from overseas at some point, but currently there are not signs that this is an imminent threat.
• Growth prospects: given Churchill’s consistent growth, continued overseas expansion and still relatively small size, I’d say the growth prospects are pretty good.

Pricing

I bought immediately after Churchill released some impressive interim results that seemed quite a bit ahead of expectations. The price has consequently bounced off a recent dip. As an exporter, Churchill has benefited from the low £ but as result faces the risk of the exchange rate rising again or that a Brexit trade deal results in it paying higher tariffs to export. Both of these possibilities looked to have been kicked quite a bit further down the road, so I think there’s room for Churchill to continue to outperform for a while yet.