Stoves puts the heat on Europe

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The Independent Online
One of the most important changes of the 1980s and 1990s for stock market investors is the increasing accessibility of firms to overseas markets. Companies which dominate the home market can no longer be written off as mature. On the contrary, their most exciting growth phases may just be beginning.

Two small companies with just such an opportunity are cooker-maker Stoves, at 324p, and war-game model maker Games Workshop, at 560p. I have written about both before. Games Workshop was 128p in January 1995 and Stoves 181p in June that year, but there should be plenty of growth still to come.

The timing of the first Stoves recommendation was less than perfect because sales were affected by the hot summer that year. But the problem was confined to the trading period to the end of November 1995; there was bumper growth in the next two half-years as a backlog of deferred orders brought strong sales growth. The company reports 43 per cent sales growth to pounds 39.8m, with profits up 57 per cent to pounds 2.4m, for the half to 30 November 1996.

Prospects look good in the UK, with market share still growing and scope for margin improvement based on hefty investment at the group's factories. Managing director John Crathorne believes that the group's share of the UK market is now around 18 per cent.

Rival cooker manufacturers are invariably part of larger groups without Stoves' focus on its core market. Margins have grown from minimal levels in the early 1990s to 6 per cent in the latest half year, and there is room for further improvement.

But the big opportunity is Europe. Stoves, which began life in its present form as a management buy-out of the struggling Valor business in 1988, has been spectacularly successful against European imports. It looks ideally placed to carry the attack to its rivals in their home markets.

The assault has been well planned. Stoves derives its competitive advantage in the UK not from low prices, but from high service and a flexible production system which delivers high quality and wide customer choice. In effect the company is able to customise cookers for configuration, colour, finish and trim.

After two years of market research the group is targeting the German and French markets, competing in the same way. Mr Crathorne is excited; Germans are keen to individualise their kitchens and cookers, making them suited to the Stoves approach.

However, he warns that success will not be instant. The group has been building its distribution network in Germany and this month launches the Stoves range, to be sold through a German company, Stoves GMBH, at Domotechnica, Europe's leading biannual white goods fair. If all goes to plan, by summer 1998 the group will be ready to start assembling cookers at its own plant in Germany targeting a market worth around pounds 1.5bn, three to four times the size of the UK. Further sales are likely in connected markets like Belgium, Denmark, the Netherlands and northern Spain. The move into France is some three months behind Germany in development terms.

The first major benefits from Stoves' drive into Europe should come in the financial year ending 31 May 1999. Meanwhile, analysts are looking for profits advancing from pounds 4.3m to pounds 5.9m this financial year and pounds 7m for 1997-98. This would drop the PE to around 17, with all the benefits from continental European sales growth still to come.

In contrast, Games Workshop is pursuing a formula already proven overseas. In the just-reported half to 1 December 1996, in which sales and pre-tax profits roared ahead by 41.6 and 51.4 per cent respectively to pounds 27.6m and pounds 4.8m, 63 per cent of sales were generated overseas. This compares with 55 per cent a year earlier and the trend should continue. Of 13 new stores opened in the period, three were in the UK, six in continental Europe, and one in Ireland, Canada, Australia and Hong Kong.

The scale of the markets being addressed shows that the company has barely begun to exploit the overseas potential. There is also scope in the US. In the half, US sales grew from pounds 3.1m to pounds 5.5m against pounds 8.1m for the previous year. Even with the strong pound, analysts are looking for full-year profits of pounds 11m against pounds 8.9m. A prospective PE of 25 is high by normal standards, but looks to be too low for this exceptional company.