Just put Brand Architekts (previously Swallowfields) out of its misery

Brand Architekts (LON:BAR) (previously Swallowfields pre sale of manufacturing business).

Copied this from post just put in SCVR from couple of days ago. I suspect that BAR is a low interest stock but any views relative to my points below I'd be interested....

I had a look at this stock around the time of the announced sale of manufacturing for wedge of cash near market cap (a little less I think). Seemed attractive on face of it with a smaller but higher margin business left. However, I had the following questions and concerns:

1) Trading in the remaining brands business has been poor in year to end of June. I felt why it had been weak was not well explained in annual report

2) I observe that their brands are mediocre and probably lack pull with punters in any serious way and very victim to own brand and new brand and need to discount their stuff to sell it - all a bit Superdrug apart from Alice Hart Davis.

3) If 2 above is correct then they need a lot of ongoing new product development to keep refreshing and feeding the retail beast...that leads me to wonder whether losing the manufacturing arm will bring extra costs and diminution in product development capability...

4) To what extent was manufacturing an input on brand development

5) Departure of Tim Perman as CEO following announcement of manufacturing business sale is surprising as he's only been CEO since May 2018...one would guess the sale would have been driven by him and his 'strategic vision'. To depart straight after its been agreed suggests otherwise. What's going on?...

6) They've got a shareholder base that whilst not activist includes a heavy disposition to investors that can be quite active with their companies plus some big individual holders. Perhaps the shareholders are running the show - at present BAR is without CEO or CFO and professional oversight of operations is being provided by two people who went with the manufacturing business

7) My guess from this is that Brand Architekts is not long for this world as a independent entity. Sold, closed or broken up? Dunno. Selling all as one might be hard as its a hotch potch of small middling brands. Closed doesn't make sense as that's money down the drain. Break up by selling brands they can might make sense and be more manageable/digestible path. Obvs they will be seen to be forced sellers so the price wont be great

8) Perhaps the biggest conundrum is that it appears that the small brand business has kept the big (in relative terms) pension deficit. At the end of June pension liability is £9.4m up from £4.5m end of last year. Note that brands business has revenues of £19.7m and underlying OP of £3.6m (which is before shared central costs of old combined Swallowfields). These liabilities originate primarily (I think wholly) from the old Swallowfields manufacturing business (which bought Brand Architekts a few year ago). Why would the pension liability stay with the brand business? Smacks of desperation TBH...the investors are not mugs so they must have felt it was a good quid quo pro to get their hands on the £35m cash from KDC/One for manufacturing.

So what to think re BAR? £7.2m net debt at year end turns into £28m net cash...that's roughly current market cap which looks nice as brand business is free...but then its also carrying £9.4m pension liability. To wind up the businesses and generate cash return for investors they would need to organised a buyout of the pension...don't know how that would price but lets call it a round £10m for simplicity...

So BAR is £18m cash plus a weak brand business with £20m revenue pa (that seems to be going backwards). Obviously, a bit more of the £18m gets used up winding down the business.

Or they could use the net cash to invest n and acquire more brands....that doesn't look attractive and probably not what the shareholder want either as that could mean a decline in SP at worst or a a long duration J-curve effect.

On balance I'd say that despite the high cash position Brand Architekts (LON:BAR) seems more short candidate than long.

At the time of the transaction announcement I took a tiny spec long position in spread bet account. Initially I made a nice little profit...then the share price turned on me. I closed out with the release of prelim for a small loss. The spread bet position was just to have me interested and doing some work and watching.


Note, I sought to ask management some of the above questions and got no response from IR or now departed CEO.