Good morning, it's Paul here. You have my undivided attention today. Many thanks to Jack for covering yesterday.
Here's the placeholder for Tuesday. Please see the header for the first batch of 4 companies that I'll be reviewing, which have all issued trading updates this morning.
Estimated time of completion - should all be done by 1pm, as I've started at 7am.
Update at 13:34 - most sections are done now, but I'll spend a bit more time on things, hence 3pm finish now.
Update at 14:51 - today's report is now finished.
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Covid - as usual, I'm monitoring the media for latest developments, as I'm sure many of you are. Two recent reports in particular have concerned me;
1. A King's College London study has shown that immunity may only last a few months, for people who recover from covid. Specifically, antibodies peaked 3 weeks after symptoms appeared, then rapidly reduced in the following 3 months. This raises the horrible prospect of people possibly being re-infected. This study has not yet been peer reviewed. Researchers in Munich came to a similar conclusion apparently. If these studies are confirmed, then it sounds very bad news to me.
2. The rapid spread in some southern states in the USA led to some lockdown restrictions being re-imposed yesterday, and hospitality sector being closed down again. I feel US markets are being incredibly complacent about covid, and seem to think bringing in a vaccine and eradicating it is a given. Hence the V-shaped recovery in stock markets. Now that lockdowns are returning, at least in some states (e.g. Texas, Florida & California), then it raises the spectre that this thing could be around for some time and further disrupting the economy. That is not compatible with the huge stock market rebound, in my view.
Hence I'm leaning more towards the bearish side of things over the summer. We're overdue a correction I reckon - especially for the pockets of euphoria around tech in particular, and ludicrous momentum trades like Tesla (I'm short again, couldn't resist it).
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Brand Architekts (LON:BAR)
Share price: 112.5p (before market open)
No. shares: 17.23m
Market cap: £19.4m
(I'm long)
Trading Update and Board Succession
Brand Architekts, the personal care and beauty products group with its own portfolio of brands, announces an update on trading for the 52 weeks to 27 June 2020 and board succession.
Sales in H2 - better than anticipated in last update in April, but still significantly down on LY.
Sales split - H1 down 15% to £10.6m, H2 down 21% to £5.7m - FY 06/2020 total sales down 17% to £16.3m
Covid impacted Q4. Supermarkets & online showed growth, but more than offset by declines in other High Street customers. International sales also down.
Profits are down as a result, but of course this is not a surprise, so should not be price sensitive;
Consequently, the board expect Group pre-tax profit for the full year will be significantly below last year.
Cash - this is the main attraction of this share - it sold off a division, and now has cash similar to its market cap;
Net cash position of £18.0m is a significant improvement when compared to the position reported at our interim results to January 11th of £15.1m and the £7.2m of net debt last year.
It doesn't say so, but there are likely to be some stretched creditors (e.g. taking advantage of deferral of VAT & payroll taxes) which have boosted that net cash figure. I think companies should disclose this effect, otherwise net cash or debt figures could be misleading.
Stock valuation - to review valuations. So that sound like an exceptional write-off is in the pipeline. Not good, and no indication of the likely size is given.
Market cap - this is a bit mixed. It doesn't give me enough information to value the share. Let's hope we get a broker update later today, as I'm in the dark at the moment. Why can't companies be more transparent? Not everyone has the time or inclination to make a spreadsheet model for hundreds of companies that we look at.
Why do I hold this share? It's a special situation, where you're paying nothing for the business, but get a cash pie instead. If the new CEO does something sensible with that cash pile, then if could create shareholder value. This stock is very illiquid, so it's anybody's guess what the share price is likely to do.
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Somero Enterprises Inc (LON:SOM)
Share price: 229p (unch.)
No. shares: 56.4m
Market cap: £129.2m
This is a laser-guided concrete screeding company (it makes & supports the machines).
Somero is pleased to provide an update on trading ahead of its interim results announcement scheduled to be released on Wednesday, 9 September 2020.
This update today covers the 6-months to 30 June 2020.
This is self-explanatory, and very clear;
Trading for H1 2020 ended in line with the level detailed in the Company's announcement of 5 June 2020, approximately 25% below levels required to achieve the market expectation at the start of the year of US$ 90.0m in 2020 revenues.
Following the cost reduction actions implemented by Management, the Company remains profitable and cash generative at current volumes and the Board remains confident the Company would continue to be cash generative even in the scenario where revenues fall an additional 20% from current levels.
New product development is continuing well, not affected by cost-cutting.
Liquidity - looks ample;
The Company's financial position remains secure, highlighted by net cash as at 30 June 2020 of at least US$ 28.0m, exceeding the conservative US$ 24.0m net cash expectation outlined in the 5 June 2020 update. The strong operational cash flow performance reflects effective working capital management driven by healthy trade receivable collections to end the first half of the year.
Outlook - unclear, due to factors outside the company's control, re covid. Hence no guidance given. This seems a bit of a cop out. Surely the company could have given 3 possible scenarios for the full year? Base case, downside case, and upside case. They'll almost certainly have those figures in-house, so I don't see why such important information should be withheld from shareholders - the people who collectively own the company, after all!
My opinion - clearly 2020 results are going to be poor, but it's a one-off bad year due to covid. There's nothing fundamentally wrong with the business. The only question mark is how quickly its markets recover? For the patient investor, prepared to sit back for a couple of years or more, this one should do well. And there's a bulletproof balance sheet to protect the downside. Therefore, it gets a thumbs up from me, as a long-term share. I've no idea what will happen in the short term.
Forecasts - NB, as with many companies at the moment, guidance has been withdrawn. Therefore the forward PER & dividend yields are based on old forecasts. So old forecasts should probably be seen as what the company might get back to, maybe next year, or being pessimistic, the year after that. I've checked with Finncap, and their latest note out today has no forecasts for 2020. Therefore our only option is to create our own spreadsheet forecasts.
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Vertu Motors (LON:VTU)
Share price: 23.6p (up 4%)
No. shares: 369.2m
Market cap: £87.1m
This is a chain of car dealerships.
June trading was stronger than we had expected.
The Group's cash position was much stronger than we could have hoped
Cost-cutting - £10m of annualised cost savings identified, including reducing staff by 6%
Profitability - sounds like a decent bounce-back when its sites re-opened in June;
The Board is pleased to announce that the Group delivered an adjusted profit before tax of £9.0m in June, having incurred an adjusted loss before tax of £14.2m in the March to May period.
That strikes me as a reasonable performance, although it's difficult to be sure, without seeing the full numbers.
Demand - this sounds encouraging;
Overall, retail sales demand appears to have positively rebounded due to a number of factors.
Pent-up demand is evident with consumers having increased savings ratios during the lockdown.
Lack of plans to undertake foreign holidays and to stay in the UK may also be increasing demand as well as a potential aversion to the use of public transport.
These trends have continued into July.
Liquidity - surprisingly good, but again, likely to be distorted with one-offs;
Net cash (including used vehicle stocking loans) at 30 June was £9.7m which represents an improvement of £49.2m from the previously reported position at 22 May.
A partial unwind of the reduced working capital position which gave rise to this improvement in cash is expected as the Group moves towards more normalised trading. The Group is up to date with regards payments of external rent and amounts due to HMRC for employment taxes.
It only mentioned payroll taxes, but not VAT. So I assume the group might be sitting on cash relating to deferred VAT?
Outlook - full year guidance remains withdrawn. Hmmmm. Not good enough.
My opinion - the problem with trading updates right now is that it's quite easy to cherry pick items that look good, but may be unusually distorted. That said, I thought the comments on strong trading in June, and continuing into July, sounds positive.
I think this might be a good time to examine bombed-out car dealer shares, as it appears consumer demand is coming back. I can see why many people might want to get a car, instead of sitting on a bus or train, worrying about breathing in the virus.
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Connect (LON:CNCT)
Share price: 18.25p (up c.3%)
No. shares: 247.7m
Market cap: £45.2m
Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 25,000 customers across England and Wales on a daily basis...
The previous subsidiary, Tuffnells, was loss-making, but has since bee disposed of.
Background - It's worth re-reading my notes from the interim results here on 13 May 2020. The main issues are balance sheet related - NTAV is negative at £(91.0m), and the group is reliant on over-sized bank facilities of £175m, which expire on 31 Jan 2021. The interim results contained a "material uncertainty" going concern note, over renewal of the bank facilities. Therefore this has to be seen as a high risk share, with the possibility of dilution for shareholders, if the bank forces it into an equity fundraising, as the price for continued bank support.
Today's update -
Core trading remains resilient despite the considerable disruption to the UK economy at present....
Newspaper & magazine sales were down 25% in the 6 weeks to 27 April.
Bringing those numbers up-to-date today, in the 15 weeks to 4 July 2020, newspaper sales were down 12%, and magazine sales down 18%. It would have been better to present these numbers in a table, rather than confusingly in text. I would like to have seen the trends more clearly. But it's an improving trend anyway. But a C minus for clarity of presentation.
More cost-savings have been identified.
Bank facilities - this is the big issue;
As previously reported, the Company has a £175m committed bank facility, comprising a £50m term facility and a £125m revolving credit facility. Despite the impact of the Covid-19 lockdown on trading, the Company has continued to operate well within the headroom under its current banking facilities. The facility is due to expire on 31 January 2021 and we continue to expect to complete the refinancing during the autumn of 2020.
That's ambiguous wording at the end. I continue to expect "the refinancing" may well have to include a hefty equity fundraising, and probably reduced bank facilities. But I'm guessing there, based on what we've seen in recent months at other similarly overly indebted companies. It's perfectly reasonable for banks to require shareholders to share the risk, in my view. The trouble is, with a market cap of only £45m, will there be much investor appetite to refinance an old economy, declining business like this? Maybe, maybe not. Nothing is said about accessing Government loan schemes.
Full year guidance - this is great, at last a company that actually gives guidance, I'll upgrade the C- to a B+!
Given the performance of the business during lockdown and the improved performance as a result of the gradual easing of restrictions, the Board now expects full year Continuing Adjusted EBITDA of between £35m to £37.5m (pre-IFRS16 lease adjustments) and Continuing Adjusted Profit Before Tax of between £26m and £28m (pre-IFRS16 lease adjustments) for FY2020.
Financial guidance within this statement assumes no further material COVID-19 lockdown measures introduced in the UK prior to the Company's 52 week year end to 29 August 2020.
That combines the pre-covid period with the covid period. Splitting it out;
H1 (26 wks to 29 Feb 2020) actual results: £16.3m adj PBT
FY 08/2020 guidance: £26-28m
Balancing figure, H2: £9.7m to £11.7m range
Assuming my figures are correct, that actually looks quite good. But we'd have to look through the actual results, check that all the adjustments are reasonable, and that the figures contain no funnies.
My opinion - I've covered the risks, which are substantial - this is a good example of a company which paid out too much in divis in the good years, took on too much debt, leaving its balance sheet weak going into the financial crisis. This isn't being wise after the event, I've been going on about balance sheet strength for many years.
If it manages to refinance in the autumn without diluting shareholders too much, then it could be quite an interesting special situation.
I'm impressed with how resilient trading has been throughout the crisis.
For me, the balance sheet risk, and the relentless downward trend for newspapers/magazines, tips the balance towards me not wanting to get involved. I'll keep my fingers crossed for shareholders that the bank is supportive this autumn.
I'll leave it there for today.
See the comments section for a discussion about Boohoo (LON:BOO) and Quiz (LON:QUIZ) and possible unethical production from their suppliers.
Regards, Paul.
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