LON:SAL | Space And People - The Retail Media Expert

29th Apr '14 by Orangetree

5 comments 14051 reads

SUMMARY

Bull Points

The company manages to pay off nearly £3m of debt over a four-year period; this helps to increase their liquidity position. This is shown in the improvement in the company debt ratio, high interest coverage and debt to equity ratio.
The company is continuing to pay an increasing amount of cash dividends, this year being 4.1p/share.
The company has successfully integrated their largest acquisition being Retail Profile Holdings in 2010 and the business achieved CAGR of over 40% ever since.
The company has continued to generate Operating Cash Flow that is higher than Net Income.
The Senior Management, in particular the two founders have a number of years of experience in advertising and promoting retail products in retail spaces.

Bearish Points

The company’s receivables, payables and net accrued/deferred liabilities have increased by £7m since 2010.
The Revenue per employee has come down from £172,700 in 2010 to £122,412 in 2013.
Despite paying down debt the company’s cash ratio is weaker.
Several indicators pointing to a trend change in the fortune of the business.
The company has increasing future lease obligation year after year, and the lease payment within a year stands at 21% of sales.
In their annual report 2013 they were optimistic about 2014 and three weeks later management issued a profits warning.

My brief valuation target are as follows:

Gordon growth: 59p/share

Intrinsic value: 67p/share

My targeted price: 50p/share

INTRODUCTION

The company was founded by Matthew Bending and Nancy Cullen since 2000; both founders have experience in the shopping centre arena and have found an opportunity to create a viable media to help retailers to promote their brands by interacting and educating potential customers.

Among the other senior executives and independent directors in the business most of them have previous experiences in the retail sector.

The business model consists of the following divisions: -

1. Venue, an area where the company helps local and global brands to provide services in visual merchandising in shopping centres.

2. Media buyers and brands, as an owner of promotional space the company help promote branding through their expertise, also to give companies the flexibility into choosing their themes.

3. Retailers, this is all about setting up Pop-Up shops and Kiosks.

Note that the company operates in two main geographical locations in the UK and Germany and also have a small presence in…

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TMFMayn

4th May '14

Orangetree,

I think you could be on to something with these numbers. I have looked at SAL but have wondered why the recent profit warning predicted net cash of £1m at the end of 2014, while the balance sheet at the end of 2013 showed £1.8m. Some £800k has since been spent on the dividend, but I can't reconcile how a supposed cash-generative business expecting pre-tax of £1.5m this year essentially won't improve its net cash pile. I asked this question at the AGM and the response from the FD was not that overly convincing (something about tax) and the situation you have highlighted with 'other creditors', accrued expenses and the lease obligations does not look straightfoward to me. It really should be with such a small company and the profit warning uncertainty etc for me to invest. Thanks for your efforts and research
Maynard

Paul Scott

They've been planning a fair bit of capex for a while now, to replace older, cheaper-looking kiosks with snazzy, modern, bespoke ones. This should make them stickier with the Mall owners. This has been planned for about a year, so it's nothing new, and from memory I think they said that the planned capex was about £1m, but that was at a meeting over 6 months ago.

I don't think there's anything funny going on here. They just ran into some significant problems simultaneously on a number of fronts. That's whacked the expected profit for this year, but it should still be cash generative & profitable. It paid the big annual divi a couple of weeks ago.

In my view management should be given the benefit of the doubt at this price. They had a very good 5-year track record up until about 2 weeks ago, and you often get bumps in the road with smaller, entrepreneurial companies. They know what has gone wrong, and are fixing things. So it's all about how they execute going forwards. It's possible there could be another profits warning, but due to the ungeared Balance Sheet, that's not something that worries me unduly as I intend holding long-term, and expect this to be a much bigger company in say 3-5 years time.

Regards, Paul.

Orangetree

6th May '14

Thanks for ur comment TMFMayn,

In my article I was just merely pointing out some factors that investors could have detected before the share price collapse. As this is a small company and more obscure than others they are sacrifacing the need to pay off their obligations, instead decided to return some cash to shareholders (Nothing wrong with that). But the main thing here is their obligations are builting up so it is not a surprise to me management will forecast both lower profits and lower net cash because 2014 will be the year they will have to pay off their EXCESS obligation and dividends maybe cut or suspended for that year.

But don't get me wrong the company probably has peaked and near their trough in their business cycle. To me the company share price could drop by another 20-30%,as Paul Scott mentioned their could be another profit warnings. After that this could be a buying opportunity probably in six or seven months time depending on management actions.
Thanks
Orangetree

beatingmrindex

19th May '14

Great write up - very detailed and enjoyed looking through your blog.

Hargreve Hale continue to offload and have now gone below 12% (just seen RNS) - consistent selling is probably keeping price low and may drive it lower as they have consistently sold for nearly a month now....

intuitive6191

21st May '14

An interesting post. I have looked at SAL a number of times and one line caught the eye.

“The earning warning signals of a possible deterioration of the business since their best performance around 2011”

This was probably my key concern and seemed a distinct possibility from the way the business was structured. My conclusion was that SAL is trying to do quite a difficult job in a market which is quite heavily constrained.

There are probably only a relatively small number of prime sites in the UK so the decision then is to progress into less productive sites or go geographically further afield. Both carry increased business risk and probably increased costs.

I was also concerned about the quality of recurring income. If each temporary retail contract is only 2 to 4 months then the animal needs to be fed quite often. There will probably be a retainer or contract fee from the venue but the main revenue will almost certainly be driven by occupancy. I viewed this more as a treadmill rather than a recurring income situation.

SAL has obviously been a good investment for those who got in early. I am not sure that this can be repeated in the future.

Space and People - the retail media expert

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Orangetree

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