Small Cap Value Report (5 Sep 2014) - ALY, LWB

5th Sep '14 by Paul Scott

12 comments 17253 reads

Good morning. It's eerily quiet for announcements today, but there are a couple of interesting things that have caught my eye.

Laura Ashley Holdings (LON:ALY)

Share price: 27.25p
No. shares: 727.8m
Market Cap: £200.1m

Interim results - for the 26 weeks to 26 Jul 2014 have been published this morning. I'm impressed with them, and have picked up a little stock this morning, on the basis of a fairly cursory glance at the figures, which I'll research in more detail over the weekend.

Here are the headline points from today's interims, which all look pretty good to me;

54097423f2ec8Screenshot_2014-09-05_at_09

From looking at the results today and the prior year comparatives, it seems to be a slightly H2-weighted trading year, which I would expect from a fashion & homewares business (because the run up to Christmas is very strong for retail sales in this sector, and people tend to economise for a few months after Christmas, thus skewing profitability towards calendar H2).

Ah, I've just realised this isn't a calendar year end, it's a 25 January year end, but the point above still stands, as end Jan year ends are optimal for most fashion retailers, because it gets the busy January Sales period in the bag, and cash balances are usually at a cyclical peak in January. Cash then usually ebbs away through the Spring, and reaches a seasonal low just before Easter after payment of the March rents. Then cash builds up over the summer, and reaches another low in the autumn as Xmas stock is paid for, then spikes up hugely over Xmas & new year due to peak sales & de-stocking.

Profit before tax up nearly 15% is a good result for H1.

However, I am particularly impressed with the +8% current trading in the last five weeks - that's important because it indicates that the new autumn ranges have been well received - hence the company is probably on course to put in a good performance in the whole of H2. Weather may have helped them somewhat, but +8% recent sales tells me that the new season (autumn/winter) ranges are good - something I've confirmed from looking at their website - the furnishings in particular look a highly credible competitor to John Lewis, in my view.

Valuation - Broker forecast consensus is for a slight increase to 2.1p EPS for this year,…

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Edmund Shing

5th Sep '14

Paul, I like the look of ALY.L too, except for 1 thin - are you not worried about the low dividend cover? Looks like 2p divi covered by 2.1 - 2.3p EPS going forwards, doesn't leave much for investment... From what I can see free cashflow has hardly covered the divi either in the last 2 years... Yes net cash, but risk of dividend cut should the core business not do as well? Edmund

Paul Scott

Good morning Edmund,

Yes I agree the dividend cover is stretched, as I commented in the article;

Dividends - this is very interesting. The company has been paying out effectively all its earnings in dividends in recent years, so at 2.0p p.a. the yield is a stonking 7.3%! Normally I would discount such a high yield, as anything over about 6% is usually too high to be maintained. However, in this case with a sound Bal Sheet holding net cash, and strong current performance, the divi could probably be maintained at this level. The interim divi has been held at 1.0p.

So I think there is a possibility that the dividend could be cut, although strong current trading reduces that risk.

I would never pay extra for a share because of a high yield, if that divi was not well covered, as in this case, however, in my view it's the cherry on top of a valuation that stacks up even if the divi is say halved. It's tons better value than Moss Bros (LON:MOSB) for example, which I think has been over-priced for a while.

The downside risk seems to be that current strong trading might be a flash in the pan, and that performance slips back again. It's a highly competitive sector after all.

Regards, Paul.

loudenr

Edmund, thanks for pointing that out as I missed it reviewing the stock report. FCF is negative on an historic basis too. Does the business really need to pay a yield approaching 8% (arguably not)?Therefore I agree it could be cut

valueman

I believe Laura Ashley is controlled by a Dr Khoo who got divorced last year for £500m so he probably needs the divis !

derriman

Isn't the case that ALY management hold over 50% of the shares and this could account for the high dividend payments?

narp

According to digitallook , the div yield has been high in the last few years :

Year Ending Revenue (£m) Pre-tax (£m) EPS P/E PEG EPS Grth. Div Yield
31-Jan-10 268.40 11.00 0.67p 19.4 n/a -30% 1.00p 7.7%
31-Jan-11 285.00 24.10 1.99p 11.9 0.1 +197% 1.50p 6.3%
31-Jan-12 285.90 18.40 1.84p 11.7 n/a -8% 2.00p 9.3%
26-Jan-13 298.80 20.10 2.02p 13.7 1.4 +10% 2.00p 7.2%
25-Jan-14 294.50 20.50 1.99p 13.2 n/a -2% 2.50p 9.5%

http://www.digitallook.com/companyresearch/10771/Ashley_Laura_Holding/company_research.html

DLG12

Hi Paul. Any thoughts on what is happening at French Connection. There does not appear to have been much news of late? Regards.

Hi DLG12,

French Connection (LON:FCCN) results are on 18 Sept. So I'm not going to make myself look an idiot by forecasting what they will look like! We'll just have to wait and see. It's an interesting each-way bet though - bulletproof Bal Sheet supports the valuation, and turnaround upside is largely in for free. Whatever people might think, it's a very credible international brand, mainly for ladieswear - signature dresses - you see a lot of references to it in the fashion press & celebrity circuit, etc, not for the FCUK stuff, which you rarely see in their promotional material now.

So I think there's everything to play for with FCCN, if their turnaround gathers pace. Interestingly, I saw some analysis recently which suggested that the problem leases are now within about 3 years of expiry, so that will give the bottom line a decent boost, as they are able to close the loss-making shops gradually.

Regards, Paul.

Flackwell

Re:dividend cover - surely a good sign as in effect the dividends have continued to be paid through the retail lull but now the company is moving forward, increased cover should be a natural by-product

So for me, nothing to worry about

acdoug

re ALY. Book value/share has been declining over last 5 years – gross and net FA have reduced, but sales value (?) of assets is not retained in the business. Operating cash flows are minimal, and, as said by Paul, all profit is paid out as very high dividend. The value of the company is being dribbled away, and one has to ask what they know about running hotels.

matt_smith101

Some absolutely awful reviews of Laura Ashley's customer service can be found with a quick google search, such as here:
https://www.trustpilot.co.uk/review/www.lauraashley.com

The consistency of the negative comments is a bit of a worry!

Highpeak

7th Sep '14

Interestingly, despite its high ranking, ALY doesnt qualify for any of Stockopedia's screens. Not even the income ones. I do like the company from an investment point of view but usually look for div cover of 2 or more if i'm after yield.

I too would question why they want to run hotels though it may help showcase their home furnishings.

Small Cap Value Report (5 Sep 2014) - ALY, LWB

Laura Ashley Holdings (LON:ALY)

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Paul Scott

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