I Read The News Today Oh Boy! 5-Jan-2018

5th Jan '18 by matylda

22 comments 5718 reads

Morning All!

Back to just the one update today, perhaps next week will see us a little busier…

Gear4music Holdings ( £G4M ) – 770p – £160.7m – PER 59.3

Trading Update For The 4 Months September 2017 To December 2017 – Revenues up 42% to £34.564m, reflecting same (42%) increase in own brand and other brand. Trading is “in line with the board’s expectations”. The group is confident it “will continue to grow rapidly over the medium and longer term, as we continue our mission to become the best musical instrument and equipment retailer in Europe”.

This is impressive growth indeed but I have my reservations. The Operating Margin is very small (2.67%), the ROCE is not particularly impressive (7.97%) and the PER is 59.3. Comparing 2018 forecasts and 2019 forecasts, Revenue £81.3 vs £102.1 (+25%), Profit £2.14m vs £2.8m (+30%). On a PER of 59.3 they’re going to have to surprise on the upside here.

A great weekend to all!

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MrContrarian

5th Jan '18

My morning smallcap tweet:

Crawshaw (LON:CRAW), Deltex Medical (LON:DEMG), Redt Energy (LON:RED)

Crawshaws (CRAW) trading. 15w to 24 Dec: Rev up 0.6% but LFL -6%. They are merely standing still by opening factory shops. Blames consumer environment even though they are a value brand. 'Continued progress' against strategy as Britain's leading value butcher. If that's progress I'm a Luddite.
Deltex Medical Group (DEMG) warns FY rev £5.9m down 7% as £200k order delayed. Signs of "pipeline blockages" easing in Q4 2017. You don't want to know what image that puts in my mind. First revenues generated from three new potentially large accounts. Cutting costs.
RedT Energy (RED) exits legacy Camco business (clean energy project financing arranger).

matylda

OK - Last example (I know nothing about guitars but surely this is a good one!)...

https://www.gear4music.com/Guitar-and-Bass/Rickenbacker-4003S-Bass-Guitar-Jetglo/16EW

https://www.amazon.co.uk/Rickenbacker-Standard-4003S-Electric-Guitar/dp/B00ZU4HUCW/ref=sr_1_1?s=musical-instruments&ie=UTF8&qid=1515138528&sr=1-1&keywords=Rickenbacker+4003S+Bass+Guitar%2C+Jetglo

G4M is almost £200 more, about 10%.

That's me done now :

LeoInvestorUK

On the guitar example, delivery from amazon is also (nearly) 2 months earlier.

Nice spot - Missed that, was only looking at the cost of postage - Thanks.

Ramridge

Re. £G4M The update makes no mention of profits or earnings. Its all about sales growth.
The silence is a worry.
No position and no intention to buy.

Agreed

GrahamF

Matilda

The sales growth is there in the numbers so although it may not appear obvious from spot checks why people are buying from £G4M they clearly are and we need not be concerned about the sales so much. It doesn’t matter whether or not we personally would buy from them, the numbers show that the market is buying from them in substantially greater quantities. (But I think they are aiming to compete more against small, independent music shops with specialist knowledge than box shifters on Amazon).

It is the profitability that is more at issue.

They have made great efforts to expand their own branded products and I expect that this is where they have the opportunity to make better margins.

Until the start up costs of the new distribution depots work their way through and they have achieved economies of scale there it will be hard to see how profitability will map out. So, no real way to know when or how profitable this will be until we have the actual profit numbers at the next set of results.

I have a small long position and happy to stay with that based on the sales growth but not ready to add to it until the sp drops more or we have satisfactory results at the next update. But I remain positive for the long term and view the current profitability issues as principally the cost of investing for the future.

Cheers Graham,

Appreciate the view very much and I am in general agreement here.

It does not appear obvious from spot checks why people are buying from £G4M.

The sales growth is evident from todays numbers and the fact it is forecast to grow sales from 2018 to 2019 by 30%.

For me however, it does matter whether or not I would personally buy from a company I am considering investing in - Trying to look at it with my own hat on and the hat of "real customers" if my hat doesn't fit well.

Small, independent music shops with specialist knowledge. I would have thought customers would want to buy from and support these guys, so they can go and use them next time. Have a chat, discuss stories, pay a little over the odds, keep the local guy in business and know he's going to be around a little longer. Those customers who don't have that mind set will surely not do so - Simply based on price and delivery. So they will hop online for the best deal.

So, I just question are sales up and margins down to reflect this cost of acquistion (of customer)? Perhaps, perhaps not.

Am I willing to pay an almost PER of 60 for something forecast to grow Revenues of 30% 2018 to 2019 - No.

Can I see room for a further squeeze on margins - As you say it's a spot check, but yes I can.

It is clear they have set their house out well now, with the own brands and distribution but as you say "It is the profitability that is more at issue" and for me the points I note above.

Wish you well with the investment. I may live to regret it (this amazon for music opportunity (which is all it really is in my book)) but I am quite relaxed about it. Reasonably satisfied why I am sitting out at present.

Beginner

A relation is a professional musician. He knows £G4M well. his conclusion: "Like ikea, the good stuff ain't cheap, and the cheap stuff ain't good." He would never use them.

JamesS

With regards to £G4M I would be comparing prices to a similar music shop, gak.com is one I use as a bedroom musician as it is widely considered to have good prices.
https://www.gak.co.uk/en/gibson-lp-standard-hp-2018-blood-orange-fade/910755
https://www.gear4music.com/Guitar-and-Bass/Gibson-Les-Paul-Standard-HP-2018-Blood-Orange-Fade/226X
That is a top of the line guitar, same price on both sites

back2value

This may be true, but if G4M becomes the Ikea of online music stores, I doubt they'll be too worried ...

B2V

Hi Matylda

I appreciate what you say. I would just like to come back to you on one point you made.

“For me however, it does matter whether or not I would personally buy from a company I am considering investing in - Trying to look at it with my own hat on and the hat of "real customers" if my hat doesn't fit well.”

Are all your investments really in companies you would buy from?

I hold a house builder but I will probably never buy a brand new house. I hold a mortgage broker but have no need these days of a mortgage. I hold businesses that are B2B type businesses so as a consumer I will never buy from them. I hold a construction equipment company but I’m not going to hire a dumper truck. I hold them because I think the prospects for the company and the share price are good. I’m never going to need a laser guided concrete levelling machine but I hold a company that has a pretty good business supplying them.

In marketing one of the first lessons I learnt was customers buy for their reasons not mine. I personally may not like a product but if there’s many customers that do and there’s a business that can make good money from that, then not considering that business because of my own personal tastes is getting close to cutting off my nose to spite my face in my view.

Each to their own. If your approach is working well for you then that’s great. However, for myself, I think it is better to try and leave my personal tastes to one side as being essentially irrelevant to whether something represents a good investment opportunity or not.

In some ways I think this makes investing in B2B businesses a bit easier to do because it is easier not to be swayed by personal tastes.

Hi Graham,

Thanks, no problem.

In response to your query - "Are all your investments really in companies you would buy from?".

The answer of course is no, I made the assumption this implied where it was appropriate.

nbeeny

Hi

Just looking at your example from a different perspective.

G4M have grown international sales the most - 69% I believe.

If we take the Rickenbaker guitar in your example and compare from a customers perspective in say, Germany. We see that:

On Amazon.de the guitar is for sale for EUR 2564.56 plus 12.50 shipping.

On G4M Germany the guitar is on sale for EUR 2317 with free delivery.

This was just a cursory search. But you can see, perhaps, where at least some of the growth is coming from and why?

They may not necessarily be cheaper here in the UK, but there is a good chance they are to people in other countries. - As is the case for lots of items from many retailers, having been an ex-pat for a short while I know that this is often the case for many products.

N

peterg

Of course, you could argue that the prices in Germany, and probably elsewhere on mainland Europe, are low as G4M is keeping that way while they push (successfully) for entry into those markets. If so it implies low margins, which may not be a problem longer term if they can get established on the sort of scale they are clearly aiming for, but is perhaps something to be a little cautious over in interpreting the impressive growth in the non UK markets.

For the record I sold today, almost on the anniversary of my purchase. I think there is a good chance that G4M will do well, and I'll be keeping an eye on them, but I am wary of a company that needs to keep its growth up at these high levels for some time to justify their rating, particularly with a degree of economic uncertainty, and issues about the future trading relationship with the rest of the EU potentially having an impact over the next years. A modest profit in hand now has attractions under the circumstances!

Peter

simoan

On G4M: As a guitarist I am gob smacked that people would buy a guitar without playing it first, especially if you are stumping up three grand. So I assume G4M are reliant on people trying out instruments first in the small independent shops and they may have a problem if they put them all out of business by undercutting them on price. Since the expensive items are where the biggest margins are, it all seems a little self-defeating as a business plan.

I've never really seen the attraction of G4M as an investment - to me it's really just a low margin distributor of branded products - but well down to those that did.

All the best, Si

Yes Si, I am of course a "non-guitarist" but I would have thought, perhaps like a new bike, you would want to try it before you buy it.

That said though - Although they are usually smaller ticket items, I never believed people would buy clothes online. I never have. I'm a try it on kind of person. But, here was me thinking everyone else was the same.

Yes Si, I am of course a "non-guitarist" but I would have thought, perhaps like a new bike, you would want to try it before you buy it.

I would say a guitar is even more personal than a bike and something you definitely need to feel and play before you buy it. The whole point is that it has to feel right and you have to like the tone of it and even with modern manufacturing techniques, each guitar will still be unique. I'm probably showing my age but I used to know people that would only play a Les Paul or Stratocaster from a certain year - If you're a real guitarist, guitars are like vintage wine!

cig

Try it on works fine online: you just return stuff. My partner sends back 80% of the clothes she "buys" online. To my surprise no shop has blacklisted her yet.

Maybe you can order 10 guitars on G4M and keep the one you like.

Damian Cannon

To me it makes perfect sense to use your personal experience of companies that you do, and don't own, as an input into your investment process - where is this is practical/appropriate.

Hence I've just return from a Jet2 holiday (which was very good - Dart (LON:DTG) know what they're doing), I only buy Fevertree Drinks (LON:FEVR) tonic and will probably order a pizza from Domino's Pizza (LON:DOM) tonight. Conversely I only shop at Tesco (LON:TSCO) because there's no viable alternative locally and don't bank at Royal Bank of Scotland (LON:RBS).

That said the system isn't perfect as I don't hold shares in Majestic Wine (LON:WINE) even though my wife loves shopping there...

I Read The News Today Oh Boy! 5-Jan-2018

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Matylda

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