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designcapital – Biggest Contract Win to date: Strong Buy at 14.5p – Price Target 39.1p

designcapital, the AIM listed high end furniture producer and distributor, has today announced its largest contract win to date for its Forum Diffusion subsidiary. It is to supply 1,700 workstations for the Paris HQ of an international French firm in a contract worth 1.9 million Euros. The workstations will be installed between 15th June and the end of November. For a firm that generated total revenues of £6.2 million in calendar 2010 this is clearly material news and according to CEO Frederick Bobo,  “This significant win … illustrates the fact that Forum Diffusion is again well positioned in the contract market in France. It is also further evidence of the return of customers to Forum, who were previously prevented from buying from it whilst we restructured our French businesses. This excellent win supports our view that we will see a return to a level of sales not seen since we acquired Forum for €1 in April 2008. This level of sales, in addition to further reductions in operational costs due to the full subcontracting of Forum logistics by the end of July 2011, puts Forum strongly back on the path to profitability.”

In our previous note we expressed the view that while 2010 had been a year when designcapital established the foundations for creating a profitable growth business, 2011 would be a year of delivery.

During this year we expect the group to expand both its retail unit (Artelano) but, more significantly the Forum wholesale operation aggressively. The company is, we believe, accelerating the process of creating an e-procurement platform allowing small architects and builders to procure high quality branded design goods at “trade” prices and this – while not contributing greatly to 2011 numbers should accelerate growth from 2012 onwards as should the opening of  a London showroom, although this UK offering is – we believe a number of months behind schedule.

We continue to assume that the new London showroom and the procurement offering make a minimal profits contribution in 2011 but do start to contribute materially from 2012 and that no acquisitions are made during 2011, something we regard as unlikely. The management of designcapitall believes that within five years, the group (driven largely by Forum and to a lesser extent by the new procurement business) can be generating a 10% EBIT margin on revenues of £100 million and given that the current market capitalisation is only fractionally over £9 million that potential provides obvious investment appeal. However we value the business on the basis of 2013 EBITDA and believe that for a company now firmly established on the growth trajectory a 2013 EV/EBITDA multiple of 8 is not unreasonable and consequently, at 14.5p, we reiterate our stance of strong buy with a price target of 39.1p.

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