Shares: Wallpaper and fabric trio find softer seat

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The Independent Online
ONE OF Britain's lesser-known industrial success stories is the design and manufacture of wallpaper and soft furnishing fabrics. We virtually invented the business; and patterns created by the designer William Morris of the Victorian 'arts and crafts' movement, who died in 1896, still sell all around the world in vast quantities.

Americans and Europeans cannot get enough of our designs. And this has enabled the better-run operators in the industry to survive the ferocious UK recession that rapidly killed off weaker businesses such as Coloroll. Now there is the possibility of devaluation, a UK housing pick-up and a wider recovery from recession in continental Europe. Together, these should create buoyant conditions in an industry where a prolonged tough period has been sorting men from boys.

One company that looked particularly vulnerable in the early days of recession was Osborne & Little, the Clapham-based manufacturer of wallpaper and fabrics, which enjoyed spectacular success in the 1980s by doing for walls what Smallbone did for kitchens.

The group had a tough time and was finally forced to cut its dividend in 1991, when the shares fell sharply. But its resilient chairman, Sir Peter Osborne, was not too fazed. The group slogged on steadily through the bad times, continuing to produce a stream of new collections under the Osborne & Little and Nina Campbell names that have given it such a powerful reputation.

Now there are strong signs, likely to be confirmed by interim results due in December, that the group is established on a steadily improving path. Unlike some rivals, Osborne's substantial US business has continued to produce solid returns and is now benefiting from the stronger dollar. It also sold its French business in August 1992, producing a seven- figure charge against last year's profits but eliminating a poorly performing business. And borrowings fell from 118 to 14 per cent of shareholders' funds.

Meanwhile, the continuing business traded well, with turnover up from pounds 13.5m to pounds 16.1m and operating profits on continuing operations before exceptional charges up nearly 20 per cent to pounds 1.2m.

Finally, a share buy-back programme in March reduced the number of shares by 10 per cent with positive implications for earnings per share. Profit margins last year were down to almost a third of the late 1980s peak levels, and with forecasts suggesting the p/e will fall to 15 and 12.5 on likely earnings this year and next, the shares look cheap at 186p.

The buyer of Osborne's French subsidiary was the furniture and fabrics specialist Cornwall Parker. The problem for the group is that the main buyers of its up-market furniture are older consumers, many of whom have seen their incomes from savings hit by falling interest rates. A warning in June that sales were well below expectations forced it into redundancies and short-time working. Last reported profits were down from pounds 7.9m to pounds 4.6m.

The 'A' shares have slipped to 145p, but that is in line with net asset value and likely to prove cheap in the long term. The management has a deservedly good reputation, and the group expects profits to recover dramatically when demand revives. Buyers may need patience but should reap rich rewards.

A company that may produce quicker returns is Walker Greenbank. A one-time conglomerate, it has been rescued from near-disaster and refocused as a specialist wallpaper and fabrics business under the leadership of Charles Wightman, who became chief executive four years ago. Other businesses were sold - before the developing recession made sales almost impossible - to raise pounds 35m and turn pounds 25m of borrowings into pounds 8m of cash.

The wallpaper business was strengthened by acquisitions, such as the purchase of Europe's largest manufacturer for the commercial market in 1991. Last year, this business made profits of more than pounds 2m against an pounds 8.5m acquisition cost.

The group is also building up its fabrics side and has recently dipped into the carpet business with further expansion planned. On forecast earnings per share of 5p, the shares are not cheap at 94p, but the company's progress justifies the price. And its solid ranks of institutional shareholders mean that there will be no problem funding further acquisitions.

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