A lot of things I like about this share, but the declining cash flow is niggling me. Cash on the balance sheet is creeping up as is working capital, so I can't work out why operating cashflow is sinking like a stone. They are in financial services so I suspect it's related to that, but can't put my finger on it.
Any ideas?
Cheers, BOC
Hi BOC,
In this case, I think it is simply due to growing the business. Looking back through the years on Stockopedia, both operating and free cash flow peak in 2013/14 just as revenue and profit trough, and then cash flow drops as revenue and profit climb. Looking at the latest interims, operating cashflow prior to working capital movements was a healthy 7.7m This was then all swallowed up (and more) by working capital movement - increase in inventories, increase in receivables, decrease in payables. It certainly looks like they've had to pay some of their bills in the last 6 months!
As long as they correctly value their inventory, and receive their receivables, I don't see it as a problem. The crux with all lenders is is their revenue recognition correct. I'm not an expert - hopefully someone else with more knowedge will reply.
(I hold H & T (LON:HAT) in my stockranks-based ISA).
Thanks Isa. Helpful, and hopefully others have more to add.
My other question on this company is why did its revenues (and share price) fall off a cliff in 2012/13?
H & T (LON:HAT) is one of Graham's major investment (or at least it was a few months back). If you go to the StockReport page, click on Discuss and you will see all discussions for this share. My advice is for you to read Graham's analysis over the past few months. He may have the answer for you.
I think it was partly due to the price of gold falling which effected the profits since then they have restructured the business to be less effected by gold prices.
Re the price drop - that would definitely make sense if they were sitting on a mountain of gold.
I've read the stock reviews. I am tempted to add this as a 12 month buy and hold. This type of business will fare well as real household incomes get squeezed by inflation. Management have been in the business for a long time. I am not expecting anything flashy from them, just slow and steady and hopefully a few positive tailwinds.
Just from a quick glance at the 2016 final results, you can see a large increase in inventories and receivables which has depleted operational cf by just over £9m -
Operational highlights:
· Personal Loans grew with the net loan book increasing 123.8% from £4.2m to £9.4m
Stock has also gone up as well, tying up more cash. They seem to buying up gold and fine jewelry from looking at the web site.
Operating cash flows before movements in working capital |
| 13,611 | 10,699 |
(Increase)/Decrease in inventories |
| (4,991) | 4,469 |
Increase in other current assets |
| (202) | (417) |
Increase in receivables |
| (8,154) | (1,367) |
Increase/(Decrease) in payables |
| 3,585 | (507) |
|
|
|
|
Cash generated from operations |
| 3,849 | 12,877 |
Again, glancing through the 2012 results they explain the drop off in revenue/profits - As expected, Group pre-tax profits fell year on year, from GBP23.5m to GBP17.0m due to reduced gold purchasing profits and the associated cost of our store expansion programme. Typically it takes two to three years for a greenfield pawnbroking site to achieve profitability (at a profit before tax level after full allocation of overheads). In the prior year, the Group also benefited from 'super-normal' profits due to the 24% increase in the gold price.
Just read Graham's report and after a further dig around, it looks like a promising investment.
