Carpets, not curtains, for Airea

This is what a bargain looks like

Look down at your office floor and you can probably see this (above).

Perhaps I’m not being fair to the carpet industry, picking a grey Burmatex to illustrate my first thoughts on carpet manufacturer Airea. But grey is how I feel about the carpet biz, like most investors probably.

We have every reason to be repulsed though, not bored, by Airea, which has, if you will excuse the pun, been through the mill. As Sirdar, the name it sold with its knitting yarn business in a management buy out in 2007, it frequently graced value screens, only to reappear even cheaper.

For the share price, the rot has never really stopped, but I’m wondering if, after years of rationalisation, mill closures, and asset sales, what’s left of the underlying business is viable.

According to the headline results the company has been profitable in its last two financial years and if that remains so, I don’t think the shares can get much cheaper. According to the bargain screen the shares cost just 0.6 times net working capital, a statistic I will confirm in another post soon.

Airea manufactures tufted carpets and carpet tiles for the commercial market under the Burmatex brand and the residential market under the Ryalux brand. While investigating Victoria I got the impression tufted carpets are cheaper to manufacture than Wilton and Axbridge, and therefore more likely to make up the value end of carpet retailers’ ranges, but Airea claims some innovations of its own, like bespoke colour matching.

The 2011 annual report has yet to be published, but in September’s preliminary results chairman Martin Toogood talked of sustained suppressed demand, particularly for residential carpets, which has been the refrain for some years now.

Judging by the blurb in successive annual reports Burmatex, used in offices, shops, schools, and hospitals, seems to be keeping the company in profit. Despite rationalisation and investment in Ryalux, cost cutting and efficiency gains have not been enough to offset a huge decline in residential demand. Sales fell from £28m to £13m in round numbers (red bars) between 2008 and 2010.

Total sales fell another £2m to £29.0m in 2011 according the preliminary results. With contract sales in line with 2010, the contraction was limited to the residential market as the company continues to withdraw unprofitable products.

Still, this year the company seems to have halted falling sales in the contract market and slowed the falls in the residential market. The worrying line in the chairman’s statement, if, as we are led to believe, government cuts are just beginning, is this one:

Strong deliveries against major retail store refurbishment programmes and public sector new build projects compensated for weak demand in the general maintenance and refurbishment market.

If this year Airea was saved by government spending, what happens when there’s nobody left prepared to spend? It is, of course, a problem faced not just by Airea, but vast swathes of the economy.

That’s the gloomy bit. And it’s supposition, against which I can lay some rather more concrete facts.

Subject to checking the finances, Airea looks like a recovery situation. It’s been cutting costs, selling assets and revamping its product. It’s very cheap. It’s returned to profitability. And it has new management, who are committed to the business.

Chief executive Neil Rylance, who joined in 2008, has built up a 5.5% stake, and chairman Toogood (moved up from non-executive director in 2009) has a 4.5% stake, both buying significant quantities of shares in April and June this year. Finance Director Roger Salt has also bought a modest number of shares this year.