Good morning, it’s Paul here with the SCVR for Friday. What a busy week it’s been!
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Timing - Today's report is now finished.
Agenda -
Card Factory (LON:CARD) - Trading statement - covenant breach imminent, so risky
Xaar (LON:XAR) - Trading update FY 12/2020
Finsbury Food (LON:FIF) - H1 trading update
Clipper Logistics (LON:CLG) - Founder/Chairman sells £62m-worth of shares
N Brown (LON:BWNG) - Q3 (18 weeks to 2 Jan 2021) Trading update
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Card Factory (LON:CARD)
37.3p (down 7% yesterday) - mkt cap £127m
Card Factory, the UK's leading specialist retailer of greeting cards, dressings and gifts, announces its trading update for the eleven months ended 31 December 2020.
Obviously it's been hit hard by covid/lockdown enforced store closures, no surprise there. Revenues down 34% in total, of which store sales down 38.1%. This suggests that online growth, whilst good in % terms, is nowhere near enough to compensate for store closures.
Although stores did trade better when they were allowed to open;
Recovery following first national lockdown exceeded board's expectations, building to sustained positive LFL from early October 2020 with the shop estate fully open
CARD was highly indebted before the covid crisis, so I am concerned about its solvency & bank position, which could end up forcing it to do a big placing.
It reckons current bank facilities are enough;
Assuming the current national lockdown for non-essential retailers does not extend beyond 30 April 2021, existing bank facilities of £200m would be sufficient to meet the current requirements…
Despite the unprecedented nature of this year, our aggressive but considered management of costs and cash has resulted in a material reduction in our utilisation of the debt facility, resulting in net debt being reduced to £90m as at 31 December 2020, compared to the net debt of £119m as at 31 December 2019.
We would not expect this facility to be fully utilised unless the national lockdown, restricting non-essential retailers from trading, continues beyond the end of April 2021.
Bank covenant breach looming - this is a major concern;
… we anticipate that current covenants will be breached at the end of January as the significant impact of the November and current national lockdowns are reflected in our trading performance. We continue to have constructive discussions with our banking syndicate.
Note it says “will be breached”, not may, or might be breached.
Despite initially being given access to Coronavirus Corporate Finance Facility (CCFF), following changes to the scheme rules, we no longer have that opportunity. We are, however, progressing discussions to access supplemental funding options.
What does that mean? Are they looking at alternative debt facilities, or an equity fundraising?
Guidance - I’m surprised the anticipated loss is so small, at just £10m. Although the company must have received substantial assistance under the furlough & business rates relief schemes.
With the certainty that all stores will be closed through to the end of January 2021, the Company anticipates revenue for the full financial year of approximately £284m, and a loss before tax of approximately £10m (equivalent to Adjusted EBITDA (excluding the adjustment for IFRS16 for Leases) of c. +£5m)
No guidance for FY 01/2022, because they don’t know when the shops will be able to re-open.
Stretched creditors? We’re not told, or given any numbers, but I would take it as given that VAT would probably have been deferred, hence flattering the net debt figure.
My opinion - I’m not interested in this share, because the debt was too high before covid, and once creditors have normalised, it’s likely to look quite a lot worse in future. Therefore, I imagine an equity fundraising is only a matter of time.
If we want to bet on consumers returning to the shops, then I think there are much safer options in terms of balance sheet strength. Also, I feel CARD has missed big opportunities re online. Press reports are saying that Moonpig is intending to float, with a £1bn valuation! Clearly CARD has missed the boat, in terms of online. I’m only interested in retailers that are also doing a large amount of sales (half or more) online. Examples are Next (LON:NXT) and Joules (LON:JOUL) (I hold).
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Xaar (LON:XAR)
138p (down 15% yesterday) - mkt cap £109m
This share has had a great run up in price, but took a breather yesterday, down 15% on publication of its latest trading update.
It’s had a lot of positive commentary in recent months from renowned investor Richard Crow (CockneyRebel), and Andy Brough from Schroders has talked about it positively several times. The bull case is that it’s a turnaround, with good technology, plenty of cash, and a likely takeover target in due course.
I last looked at it here on 16 July 2020, seeing a possible turnaround, but wanting to see more evidence first before diving in. Pity, as it’s more than doubled in price since then!
Xaar plc ("Xaar", "the Group" or "the Company"), the leading inkjet printing technology, today announces a trading update for the year ended 31 December 2020.
The Board is pleased to announce that, with the on-going successful implementation of the new strategy, trading was in line with its expectations. Revenue for the year was approximately £48m and in line with that recorded in FY2019.
Xaar achieved £23.7m revenues in H1, so H2 is £24.3m - hardly changed.
It lost £(9.8)m in 2019, on an adjusted PBT basis (continuing ops).
H1 2020 also saw a loss, of £(3.9)m on the same basis, which annualises to £(7.8)m loss, not much better than 2019.
The commentary says positive things about products, etc.
Cash & liquidity - sounds OK, but nothing is said about whether any creditors have been stretched or not;
The Group retains a strong balance sheet and cash position. Cash and cash equivalents at 31 December 2020 were £20.2m. This was driven by positive operational cash generation in both Printhead and EPS, as well as maintaining a strong focus on cash and disciplined cost controls.
Outlook - promising profits in the future;
… the order book remains strong with a positive pipeline. We continue to rigorously review opportunities available in the market, remaining focused on our strategy, and are on-track to return to profitability and growth.
Xaar said that the “short term order book is healthy” in July 2000, but that doesn’t seem to have translated into any significant improvement in revenues in H2.
My opinion - profitability at Xaar was previously dependent on Chinese printed tile manufacturers buying Xaar printheads. That fell off a cliff in 2018, and the company has made losses ever since.
Therefore the £109m market cap hinges entirely on it being able to rebuild profits from new products. I don’t have a view either way on that, as it would need detailed research & knowledge of the sector. Therefore I’m neutral.
There’s nothing in the figures to encourage me to have a punt on Xaar shares. The commentary does sound more interesting though, with a return to profits specifically mentioned. It could work out, as Xaar has historically had good technology, and made good profits in the past. Other people are in a better position than me to judge how likely a turnaround is.
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Finsbury Food (LON:FIF)
79p (up 7% yesterday) - mkt cap £103m
Finsbury Food Group plc (AIM: FIF), a leading UK speciality bakery manufacturer of cake, bread and morning goods for both the retail and foodservice channels, announces an update on trading for the six months ended 26 December 2020 ("H1").
Resilient trading, despite challenging backdrop
H1 sales of £152.9m, down 4.1% on LY H1
Foodservice (e.g. supplying cakes to coffee shops, etc) down -27.4% - continued impact from lockdown restrictions
Net debt down £5.0m in the last 6 months, to £21.5m
Confident in delivering FY performance in line with expectations.
There’s no footnote, to inform us what market expectations are, and with Cenkos withdrawing coverage today, I’m not confident that we can necessarily rely on previous forecasts.
If the old forecasts are reliable, at c.8p, EPS for FY 06/2021, then the PER looks good value at about 10. What a pity the company and its advisers didn’t include a footnote to inform us of market expectations today.
Overall, it’s up 50% in recent weeks from the lows, and is probably priced about right for now, maybe? It should benefit from re-opening of coffee shops in 2021, so might be worth a closer look, if you like value-style shares.
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Clipper Logistics (LON:CLG)
588p - mkt cap £598m
Chairman/founder sells
After the market closed last night, it was announced that the founder/Chairman of Clipper, Steve Parkin, is selling 11 million shares in a secondary placing.
(For anyone not aware, a placing usually raises money for the company itself, by the creation of new shares, which are sold to institutions usually. However a secondary placing, is where a shareholder wants to sell a large number of existing shares, too large a sale to go through the open market. So the company itself receives no money from a secondary placing).
The reasons given for his selling a substantial stake are;
The Placing is being undertaken by Clipper founder Steve Parkin as part of an estate planning exercise and to improve the liquidity in the Company's shares.
Can we just stop this nonsense about people selling in order to improve market liquidity in the shares please? It’s nonsense, and everyone knows it. Improving liquidity in the shares is a by-product of selling, it is never the reason for selling. The reason for selling is simple - that the seller would rather have the cash, than continue holding the shares!
Result of placing - this morning, we’re informed that the placing has been done. 11m shares sold, at 565p (a discount of c. 4%).
That has raised £62.2m before fees for Mr Parkin - so party time at his place!
Importantly, he still retains a substantial stake of 13.9% of the company.
My opinion - when a founder sells a big stake, I’d be inclined to follow suit, and reduce or completely sell my own position. It’s the person who knows the most about the company, signalling that the price is attractive for a seller.
Clipper does seem a good business mind you, and has an excellent track record of growing revenues & profits. It's doing well from conventional, and eCommerce logistics. I think it makes a lot of sense for eCommerce businesses to outsource the logistics/warehousing/dispatch side of things, as that frees up management to focus on what drives their own business.
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N Brown (LON:BWNG)
65.3p (down 12%, at 09:43) - mkt cap £301m
Is this an eCommerce business, or a finance company? It’s more a finance company in my view, that sells things online, in order to make a profit on the extended payment terms. That’s why the shares always look cheap. Plus its finances got a bit stretched, although that seems to have been fixed with a placing in 2020.
It’s a potential turnaround situation too. So lots of moving parts to take into account here, and it’s very difficult to value as a result, with investor opinions differing more widely than for most other companies.
The one year chart below shows a good recovery, although I feel the recent market upward moves (since vaccines approved) have generally been a bit indiscriminate, and might reverse if not supported by improving fundamentals, in some cases.
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The longer-term chart paints a grizzly picture - with bears saying this is a lousy business, but bulls saying there’s an opportunity for a re-rating on a recovery in performance -
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Dilution - note that the business was run with inadequate capital, and paying overly generous dividends, which left it high & dry when the covid crisis struck. It had to do a dilutive fundraising (at 57p), and now has 460.5m shares in issue, as opposed to 289m pre crisis, a 59% increase. That limits the upside % on the share price, because there are so many more in issue now.
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Doesn’t this demonstrate the folly of operating with a weak balance sheet? It’s not hindsight either, as I’ve been constantly banging on about the importance of balance sheet strength since these reports began about 8 years ago. You never know what’s around the corner, hence why balance sheets need to be robust. See more on this theme in the separate section below.
Although note that BWNG has a very wealthy backer, Lord Alliance, estimated to be worth £3.1bn. That clearly came in useful when more funding was needed. The price of the fundraising could have been very much lower, without such a key major shareholder prepared to back it.
Trading update - the company is reporting for the 18 weeks to 2 Jan 2021, which it calls Q3, but it isn’t a quarter (which is 13 weeks!). I think BWNG should adopt the terminology used by Boohoo (LON:BOO), which refers to P3 (i.e. period 3, of 4 months), and P4 is just 2 months Jan-Feb 2021.
This is all self-explanatory, and sounds OK to me;
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The footnotes really matter here, because the net cash claim above strikes me as rather misleading. It actually has tons of debt, which part-finances its huge receivables book for customer extended payment terms, as explained in tiny font further down the announcement;
4 Excludes debt securitised against receivables (customer loan book) of £399.6m and lease liabilities of £5.3m
Marketing costs - a major discretionary spend for online businesses. It’s noteworthy that BWNG cut marketing spend by 40% in Q3.
Revenue trends - are improving quarter-on-quarter, as you can see below. However, revenue is still negative Y-on-Y in Q3, when other eCommerce businesses reporting so far have shown excellent growth over the same/similar period (e.g. Asos +23%, Gear4Music (I hold) +30%, and best of all BooHoo (I hold) +40%)
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Cash collection - from the large customer receivables book sounds OK. In line with last year (so no deterioration feared from higher unemployment as yet). The arrears rate has actually improved, from 7.9% LY, to 7.0% now.
Regulatory changes are mentioned as a negative factor, which is always a potential risk with a high interest lending business.
Fundraising of £100m, and a move to AIM done, we’re reminded. Net cash position of £83.7m, ignoring all the debt related to customer receivables, as mentioned above. I like this bit -
... the capital raise will also enable the business to invest further in its digital capabilities and accelerate its growth strategy.
Debtor book is £663.6m - huge! There is £399.6m of borrowings under a securitisation facility, funding 60% of the receivables book. The business model is to borrow cheaply in bulk, then charge customers a lot more, for small loans incurred from selling them stuff online. It’s a consumer credit company really.
Supply chain disruption - doesn’t sound too bad, but this is clearly an important theme at the moment, affecting lots of companies;
As with a number of other retailers, we are currently experiencing delays of two to three weeks for many of our stock deliveries, given global container issues, as well as cost pressure in the supply chain. We are working through the operational challenges which this presents us and looking to minimise the impact on customers.
My opinion - I’ve got the general gist of this now. With the fundraising done, and turnaround actions being undertaken, I think this share looks a lot better than it did last year.
I think the opportunity here is if they manage to crack being good at selling things, rather than relying on profit coming from expensive consumer finance. If that is achieved, then there could be both a profitable eCommerce business, and hefty profits from consumer finance.
The increase in bad debt provision is a bit of a worry though. The risk with consumer credit is that bumper profits are booked in the good times, only to prove illusory in the long run when customers default in a recession.
Overall, I think it looks potentially interesting. The lack of revenue growth is the main problem. Why should the shares re-rate, whilst growth is going backwards? Surely an eCommerce business should be enjoying boom time after almost a year of on-off lockdowns? Hence probably a lot more work needed to deliver a convincing turnaround.
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Business models need to change
We didn't know this before, but covid has demonstrated that many business models were deeply flawed, since they assumed uninterrupted revenues forevermore. We now know that a large part of the economy can be shut down for months at a time, repeatedly, if a pandemic emerges.
There have been lots of these in recent years, e.g. bird flu, swine flu, SARS, MERS, and now covid. Authorities managed to shut down the previous ones, because they weren’t highly contagious, but the disaster scenario was always the risk of something mutating into a form that is highly transmissible from human to human, which is what we have now with covid-19.
Is it a once in 100 years event, or is this likely to repeat? Who knows? It seems to me that the important thing is for companies to realise that their business models need to change, in particular these are my thoughts & suggestions;
- Costs need to be more flexible, so that they can be switched off quickly in a crisis - this is where online businesses have a huge advantage
- Property leases - are a millstone, and have already rendered many retail/hospitality businesses insolvent, or nearly so. Leases need to be reconfigured to turnover rents, with low base rents, so that they are not onerous in the event of a lockdown, but of course landlords are not embracing this idea!
- Many companies have too much gearing, and not enough cash reserves. This is “efficient” in the good times, but disastrous in the bad times.
- Companies with the weakest balance sheets have been forced into dilutive equity fundraisings, at the worst time, when the share price was low, and confidence weak, in the spring/summer of 2020.
- All companies (especially in travel sector) should be required to segregate all client deposits, and keep them in trust accounts (SAGA [I hold] is now moving to this model by the way)
- Far more business needs to be moved to the internet, so that things can carry on even in lockdown. Automation of routine processes is more important than ever too.
- Dividends should only paid out of genuinely surplus cash, after allowing for a substantial contingency reserve, in case of another pandemic.
- Bank covenants need to take into account possible future periods of inactivity.
- Markets could be more volatile - e.g. if virus outbreaks occur again, then markets could sell-off more quickly than last time - remember we had about 1-2 months when covid was known about in Jan-Feb 2020, before the really big sell-off began. I don’t think that’s likely to happen again, once bitten twice shy, so we probably have to live with more extreme volatility.
- Government support measures have been unprecedented. It’s important to realise that, without these, large swathes of UK companies, of all sizes, would have gone bust, and the stock market probably would have crashed by 90%, wiping out most of our portfolios, and plunging worldwide economies into a massive economic depression. This time round, QE, zero interest rates, and massive Govt deficit spending saved the day. But what if next time, inflation & interest rates are already high when another virus strikes? It doesn’t bear thinking about, it would be carnage.
- Will companies take the above into account, or just go back to business as usual? I reckon the latter, as people have amazingly short memories, and we rarely learn from past crises.
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I'll leave it there for today. See you next week, and have a nice weekend!
Best wishes, Paul.
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