Smaller Companies: Liberty added to the collection

Investors tend to measure a deal's significance by its cost. But small deals, too, can have a surprising impact. Witness Osborne & Little, the wallpaper and fabrics designer, which has has just paid pounds 900,000 for the furnishing fabrics and wallpaper business of Liberty, the upmarket but troubled Regent Street store. This could make a significant contribution to turnover and profits from 1997 and makes the shares look excellent value at 780p, given the history of share buybacks and special dividends, which have enhanced shareholder value.

Osborne & Little's progress has had its bumpy moments but overall results have been impressive. Since 1980 sales have zoomed from pounds 753,000 to pounds 27.7m for the year to end March just gone, a rate of growth that translates into an impressive compound 25.3 per cent per annum. Profits have risen in tandem, though with the occasional setback. In 1981, for example, the group made a small loss and again in 1993 when a pounds 1.2m loss on the the sale of a French operation left the overall group in the red. If the impact of the French hiccup is excluded, the group survived the collapse of the UK residential housing market in good shape, however, with significant operating profits.

Among the factors which helped Osborne & Little weather the downturn and stage a dramatic rebound has been expansion overseas. US sales for 1996, up 17 per cent to pounds 10.1m, represented 37 per cent of group sales, only just behind the UK total. Sales are increasingly spread across North America with showrooms in New York, Chicago and Washington and representation in Boston, Houston, Philadelphia, Denver, Seattle, Portland and Toronto.

Other areas are also flourishing. Sales to continental Europe increased by 18 per cent to pounds 5.3m last year and the group now has its own distribution subsidiaries in Germany and Austria, with Germany the largest market in Europe. A new subsidiary in France doubled sales in its first full year. Other buoyant markets included Holland, Spain and Scandinavia. Sales to the rest of the world, principally the Far East and Australasia, also rose by 20 per cent from a small base to pounds 1.4m.

Two other factors contributing to strong growth have been a build-up in contract business in the UK and a faster rate of introduction of new design collections. Helped by several hotel projects, contract sales grew to 18 per cent of total UK sales. Prospects look good with a new Contracts File aimed at architects and specifiers.

Osborne & Little is in the happy position of taking on Liberty's revenues and designs but few of the overheads. A design manager and sales manager are coming with the business plus stocks and a design and trade showroom at Chelsea Harbour. Liberty will have a continuing interest via a royalty on sales and some investment will be necessary by Osborne & Little to beef up the collections. The scope looks considerable.

Sir Peter Osborne, the business driving force of the group (Antony Little oversees design), points out that Liberty designs will be offered to 4,000 accounts rather than 600, with a dedicated sales force of nine rather than three or four.

His best guess is that sales will increase sharply towards a medium-term target of pounds 5m to pounds 7m and with profit margins at least matching those achieved by the rest of the group. Operating profits of pounds 4.15m for Osborne & Little in 1996 represented 15 per cent of sales. He expects a useful contribution from Liberty in 1997 which, in the medium term, might add pounds 1m to profits.

The group also has a history of using its strong free cash flow (reflecting high profitability and modest investment requirements) to look after shareholders. A share buyback operation, involving the cancellation of around 1 million shares, contributed to a spectacular turnaround in earnings per share for 1992-93; a loss of 8.1p, after exceptional items, became a positive 26.4p for the year to 1993-94. The following year the group paid a special dividend of 4p as well as upping the regular dividend by 46.2 per cent to 9.5p. Last year produced a 26 per cent increase in the regular dividend to 12p and a special dividend of 12.5p meaning that the actual payout received by shareholders rose by 81 per cent from 13.5p to 24.5p.

Analysts were forecasting earnings per share reaching 47p this year and 51.3p next before the Liberty deal. The latter figure should be significantly higher, making the shares look excellent value on a prospective p/e ratio in the low teens.

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