WATERLINE (WTL)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

WATERLINE (WTL): Rising Interest Rates Threaten - June 2007

RHPS Recommendation - SELL

Waterline needs to prove that the logistical problems that caused the recent share price setback have been resolved, while rising interest rates are posing a growing threat to sales of new kitchen units. With these risks emerging I decided that "the first cut is the cheapest" and we took a small loss and sold on 18 April.

WATERLINE (WTL): Unexpected Costs - Apr 2007

RHPS Recommendation - HOLD

Turnover for 2006 was up to expectations, but anticipated profit of £2.3m will be reduced by £500,000 owing to higher than expected costs for logistics, warehousing and IT within the Coolectric business. This is disappointing, and although this should prove to be a one-off I would hold off buying the shares until we can see that this is so.

Everything, including the kitchen sink - Mar 2007

RHPS Recommendation - BUY

"I get my best ideas," Michael Lawrence told me, "in the shower." And this source of inspiration might explain why he is determined to do for the bathroom industry what he has already done for the UK's kitchen business. Twenty-two years ago Michael founded Waterline. He still owns 59% of the company's shares and has no plans to sell out any time soon - and certainly not at today's share price. Having visited Michael and his finance director Stephen Steel at Waterline's impressive headquarters at Newport Pagnell (or "Npt Pgnl" as the road sign had it), I can understand why.

Powerful and central position...

Since establishing itself as a regional distributor of sinks and taps for the Swiss manufacturer Franke, the company has built a powerful and central position in the kitchen industry, and now distributes a comprehensive range of kitchen furniture and appliances for about 25 manufacturers including Neff, Bosch, Hotpoint, Stoves and Smeg. These it supplies largely to the many small independent retailers of kitchens, and to cement its place with both its suppliers and its customers, Waterline produces the industry's standard work of reference, its "Blue Book".

This 270-page glossy lists all the products of the various suppliers, including products from Essentials, Intuition and Zimmer. These are all Waterline's own brand furniture while the catalogue also features the nascent Waterline Bathroom range. So this catalogue is the standard reference book for 4,000 or so kitchen retailers in this country, and they can then place an order with Waterline, knowing that the goods will be delivered either to themselves or, more likely, direct to their customers within a day or two.

Deliveries nation-wide, 5 times a week...

Waterline spends about £6m a year running its fleet of 50 delivery vans. This makes it pretty sensitive to matters such as road pricing and, of course, the cost of fuel. But it is this fleet, and Waterline's network of depots in Cumbernauld, Bristol, Bolton and Newport Pagnell that are the hub of the business. Waterline can deliver nationally up to five times a week and a key to its profitability is its ability to fill the vans on every journey.

That is one reason why Waterline is gradually expanding its product range, while all the time concentrating on quality. "We don't want to be dealing with complaints," says Lawrence. "So we won't foist any cheap foreign goods on our customers. Thirty-five per cent of our products are sourced in the UK, and the rest from the Continent." He paused, before elaborating. "We are all Europeans now. I don't count Europe as foreign."

From 40,000 to 100,000 in just 3 years...

Having got that bit of political correctness out of the way, he went on to explain Waterline's strategy. Aside from launching its own-brand kitchen ranges, Waterline has also grown through acquisition. Before coming to AIM in July 2005, Waterline had bought Mike Walker Distribution, a kitchen distributor based at Clutton in Somerset. Since then it has added Brian Donaldson Distribution Ltd, a leading kitchen distributor in Scotland, and Coolectric. The latter is the UK's exclusive importer of Liebherr refrigeration appliances, described by Lawrence as "the last unsung brand in the UK." Liebherr has a double figure share of the market on the Continent, but sells only 25,000 units in the UK. Lawrence has a target of selling 40,000 in 2007 on the way to 100,000 in 2010. Waterline paid £880,000 for Coolectric, a premium of only 10% to its asset value, and since then has transferred the business from its former home in Leeds, changed the personnel, integrated it into its own distribution network and has altered the product's marketing and advertising strategy.

Lawrence was keen to stress that Waterline is not just a UK importer. It takes responsibility for marketing the products that it sells, producing brochures and handling advertising and marketing, including regional trade road shows. It also owns a business in the USA, called Boston Basins. Owned by Waterline since it opened in 1981, Boston Basins supplies kitchen products, notably Franke sinks, and bathroom products to the supply chain in the north-eastern states of the USA. The business is run semi-autonomously but has been profitable for the last 21 years.

Top-end of the market...

In the near term Waterline's fortunes will depend considerably on the level of demand for its products in the UK. So far as this is concerned, I understand that 2006 closed on a high note, and as Lawrence explained, "the rich are getting richer and the poor are getting poorer". So while the likes of MFI and B&Q may suffer from any downturn at the cheaper end, demand for Waterline's £15,000 kitchens - very few of which are sold to housebuilders - are holding up well. In fact, such is our desire for the latest must-haves such as American-style fridge freezers, water purifiers, granite work surfaces and range cookers, that we now change our kitchen on average every six years. Now Waterline is intent upon adding to its kitchen range, but also building a much larger presence in the bathroom market. The attraction is that the profit margins on bathrooms are about 25% higher than for kitchens, and since about half of Waterline's kitchen retailer clients also sell bathrooms, it sees the opportunity to create a "Blue Book" for bathrooms to go alongside that for kitchens. But there are some challenges to face. Although there are some common manufacturers of both bathroom and kitchen items such as taps, sourcing of bathroom products comes from a much greater number of suppliers. So while we may all yearn for bidets and those big, flat "rose" shower heads, Lawrence first needs to organise the supply chain.

RHPS Verdict: Given Waterline's track record, strategic position in the industry, and potential to develop the bathroom fittings business, the shares are on a cheap rating, and pay a nice dividend. In part this could be attributed to Lawrence's controlling stake, and the threat that a downturn in demand would pose to a business with high fixed costs. All the same I rate them as a buy, with a 12 month target of 140p.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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