All the trimmings

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The Independent Online
The name Essex Furniture does not immediately conjure up an image of a dynamic company in the process of becoming a national force in its industry. Nor does it smack of a business with a highly profitable formula that can be cloned, that already has 16 branches, that is opening a further four this month and plans to open many more during 1994.

I was attracted by the company's high growth rate, so I visited Southend last week to find out more. The founders, Michael and Martin Franks, like their father before them, have been in the furniture business all their lives. Between them they own just over 53 per cent of the company.

I understand that a few weeks ago they parted with about 5 per cent to help an institution acquire a significant holding. This would normally put me off, but they have assured me they do not intend selling any more shares for a long time.

The very astute Newton Investment Management was presumably the main buyer, as its shareholding has recently increased from 4.24 per cent to 10.58 per cent.

Essex Furniture trades under that title in Essex but elsewhere under the far more interesting name of Furniture Workshop. The company has branches in places like Ipswich, Milton Keynes, Peterborough, Tunbridge Wells and Croydon.

New branches are scheduled to be opened on Boxing Day in Salisbury, Newbury, St Albans and Godalming. The South is being tackled first, with the long-term intention of expanding northwards to complete national coverage.

The Furniture Workshop formula is to offer a very wide choice of lounge suites and dining room furniture displayed in well-situated, spacious showrooms.

From the vast range on offer, customers can select the fabric and trimmings they prefer and request special features like a few extra inches on the seat or back - a kind of bespoke tailoring backed up by quality (almost old-world) workmanship, mainly from their own factories.

Interest-free loans and other inducements have helped the company to expand sales on a same store basis, even through the recession. Now there are signs of a general recovery, it should do even better. The warehouse and distribution facilities are already equipped to deal with a total of 50 branches, so there is very little capital expenditure as new branches open. The premises are all leasehold and the only stock held is for display purposes. New branches therefore quickly become cash generative and, as a result, despite its rapid expansion, Essex Furniture has no debt.

The other vital financial statistics compare very well with the market as a whole. At the present price of 150p, the prospective p/e ratio for the year to next June is 16, based on the consensus forecast of EPS of 9.4p. For 1995 the forecast is for profits of pounds 2.3m, EPS of 13.2p and a p/e ratio of 11.4.

We are almost halfway through the current financial year, so we can average the two estimates to establish the 12-months-ahead forecast. The result is EPS of 11.3p and a prospective p/e ratio of 13.3.

You might argue that a p/e of 13.3 seems about right for a furniture company. However, DFS Furniture, its nearest competitor - although 7-10 years ahead - is on a prospective calendar 1994 multiple of about 17, growing at 20 per cent per annum.

Essex Furniture is growing much faster at a 1994/95 average of 45 per cent per annum, which makes the shares relatively very cheap.

The PEG (prospective p/e ratio divided by the future growth rate) is only 0.3 compared with the average for UK growth shares of about 1.3 and DFS's 0.85.

Companies like Essex Furniture, with a profitable formula that can be cloned by hard-working, experienced management, are the dream of most growth investors. I recommend the shares as a buy for the long term.

A purchase of 2,500 shares will be sufficient to enable you to qualify after three months for a shareholder's discount of 15 per cent off all the group's products at the normal marked prices in its showrooms - a significant benefit when buying a suite of furniture.

I must warn you that Essex Furniture is a USM company capitalised at only pounds 17m, so do not chase the shares. They will probably rise a little on my recommendation, but they should settle back again to a more normal level in a few days' time.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. He has agreed not to deal in a share within six weeks before and after any mention in this column.

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