SCS Group price fall

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23rd Jun '16 by Whitbyview

41 comments 15964 reads

Hi there. So SCS (LON:SCS) has the top Stockopedia stock rank on the UK market but fell 7% today. Some web searching only finds glowing recommendations. I accept it is very vulnerable to a BREXIT vote but other such shares haven't been similarly treated today from what I can see. Any ideas why the fall from favour on today of all days? Thanks :)

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Whitbyview

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41 comments

Whitbyview

23rd Jun '16

That's interesting what you say about the director holdings - the site I usually look at agrees with you but I took a look on another site and this suggests that the directors as a whole hold more that twice what the general public does, although this is dwarfed by what institutions and VC companies hold. It may be that there was a director (or VC) sale today that caused this I suppose.

Brackendale

23rd Jun '16

Thanks that is interesting/reassuring... I am tempted by this one

Rusty2

23rd Jun '16

Just been looking at SCS (LON:SCS), it appears nearly all the shares held by directors are share options at nil cost, thats why they do not show up on some sites.

Thin margins put me off, also did they not go brankrupt in 2008?

hayashi22

23rd Jun '16

Maybe people think they could go bust again. Yes they went under in 2008 and its partly the same management.

Whitbyview

23rd Jun '16

Thanks - that's a very valuable observation and probably explains a lot. Yes, they did go bust and yes, they could do so again but they have a lot of cash behind them right now and I think the 7% divi helps. My understanding from Paul's comments is that he is concerned by certain aspects of this share but given it is the top share according to the Stockopedia algorithms, has to be worth a second look. I also like the fact that because they are a high street name, you can DYOR by walking in the door and looking at the products and customer numbers should you so wish. Guess the high street is very 'out' right now and it could fall victim to the Internet like so many other retailers but personally, large ticket items I still like to go into a shop to see the size, quality etc. Call me old fashioned :)

alan000@yahoo.com

24th Jun '16

I have met the Management here a couple of times in the last year. They stress that the core reason they went bust in 2008 was the withdrawal of Supplier Credit Insurance. I can sympathise as FD of a retailer back then, and that withdrawal had big consequences for many Retailers. SCS assure me they do not have that exposure this time around, and the whole cycle of how they pay suppliers and their funding lines leaves them able to easily deal with such a event if it happened.
The legacy of that 2008 event undoubtedly still haunts the shares, though. Having IPO'd in 2015, they issued a profit warning 4 months later and hell had no fury...the price collapsed from 220 to 140 almost overnight. It proved to a short soft patch of trading for explainable reasons...but 3 subsequent Profit Upgrades to Broker forecasts have not really driven the price as you might hope and expect.
In their latest update 2 weeks ago, they gave an update on year to date trade. If you do the maths and compare to the previous update 8 weeks earlier, then the LFL Sales over that 8 weeks were +24%. So much for Brexit uncertainty there! Retailers are operationally geared, and I think the Profit and EBITDA performance will very strong indeed.
Very Cash generational business, performing very well and with a strong Balance Sheet. I think the Stocko Ranks are right to rate this highly!

Whitbyview

24th Jun '16

Thank you for that insight. The question is, does a Brexit vote destroy the recent progress or present a wonderful buying opportunity?

Whitbyview

6th Jul '16

This share continues to puzzle me. From what I can see, given the amount of cash they have and the continuing fall in the share price, very soon someone could have this business for nothing. Is that really what it is worth? I understand Brexit worries for retail but right up to the vote (irrespective of the uncertainty that was undoubtedly there) this company was making very positive noises in its various press releases. Maybe I will have a trip down to my local branch and see how trade looks sometime soon!

vik2001

6th Jul '16

despite all this it has a stockrank of 99!!

dmjram

6th Jul '16

You have to be very, very careful with cash figure in retailer accounts when they dont hold the freeholds of the stores they operate from.

They will have very high cash payments every calendar quarter to the landlords which often takes out a significant chunk of the balance shown. Dont know SCS in detail but do check the cash position vs short term liablilities - the rent amounts falling due will be in this account on the BS.

Also, they will be suffering a perfect squeeze now if they dont have significant hedging - import prices will be in US$ while they're selling in sterling, with consumer spending coming under pressure from the higher imported inflation on stapes and big ticket items likes sofas are the first to go ie a rerun of what led to their demise in the past. Richard Beddard wrote a blog on his experience with them back then - worth looking up if youre interested in the stock.

rhomboid1

6th Jul '16

There's a very good presentation on their website , from memory c. £20m of cash is customer prepayments , that still leaves a very healthy cash buffer £14m. Their gross margin is 45% so any unhedged currency risk is not going to sink the ship. I've not seen any other retailer with a pro rata stronger balance sheet. I hold a tiny position bought on Monday, I'm likely to increase it over time as the main driver for their business is demographics and I don't see them changing any time soon.

cig

6th Jul '16

Aren't we almost guaranteed a Brexit profit warning and associated price drop in the short term, even if one could argue that rationally it's already discounted?

Whitbyview

6th Jul '16

Thanks for the helpful replies - I will take a look at the suggestions. I did wonder today whether the venture capital folks who own quite a chunk of the shares are wanting/needing to scale back. That would certainly give downward pressure if that was the case. I know there is a real danger with all retail right now and there is bound to be overshoot in the downward direction ... it's just a question of when that occurs. I have bought a few more just in case there is a rebound. This could be a big mistake but with that balance sheet and dividend I will give it a go. The alternative is to sell at a loss which I know people say is the right thing to do but every time I do it the shares rebound by 20% immediately and I find I have sold at the bottom again!

Whitbyview

6th Jul '16

Was this the presentation you meant? If not, perhaps you can provide a link?

http://www.scsplc.co.uk/~/media/Files/S/ScS/pdf/interim-results-for-the-26-weeks-ended-24-january-2016.pdf?pdfdata=1

Even if it wasn't the presentation, the above link does contain one VERY interesting fact. I think what dmjram said in the previous post seemed reasonable but is not actually true. It specifically states in the presentation that they buy from their suppliers only in GBP! Of course, prices can still go up but at least any hit based on the currency will be shared with the suppliers, who seem quite reliant on SCS (LON:SCS) for business. I'm now even more unclear why this share has taken such a pounding.

rhomboid1

6th Jul '16

Yup that's the presentation, & you're right the currency issue is a non story, what we're left with is a Q : are people no longer buying sofas or floor covering?

Cisk

6th Jul '16

They went bust in 2008 and basically sell mass-market lower-end products at an always on sale price. If the same incumbents are at the helm as last time then a bargepole stock. A lot of quality companies at knockdown prices - with provence - available now than these.

And do SCS buy everything in the UK? Do they make everything in the UK with UK sourced materials? If not then there is FX exposure. I suspect there is significant exposure here. And the company targets the very sectors of the market that will could be heavily exposed to a UK slowdown.

Whitbyview

7th Jul '16

Understand where you are coming from and you may well be right - people have long memories - but the demographic issue is actually addressed head on in that presentation if you take a look. In fact, it's quite interesting the different types of customers they refer to ... makes you wonder which one you are! There move into HoF outlets is their attempt to move up market it seems.

Whitbyview

7th Jul '16

Clearly the market could come to a grinding halt. The housing market may well (as it pretty much did before the vote) but As a substitute, people seemed to be doing up their existing houses. It was not just SCS (LON:SCS) but other home improvement, carpeting and furnishing retailers were reporting the same - good sales in the first half. I like everyone else don't have a clue but even if it goes completely belly up, they have money to ride it out and even expand as others go under. Can understand people's reservations but I shall be watching this one with interest.

alan000@yahoo.com

12th Jul '16

Some interesting points. I have worked as an FD in this sector, and have also met Smith and Knight a couple of times this year.
In terms of free cash, I do not believe you HAVE to ring-fence the customer deposits in any way. It is a risk for the Credit Card Company, but the retailer can use that Cash. That 10% dividend yield does look well covered, firstly by the current year projected EBITDA (their financial year is almost at an end now) and also the Cash on the Balance Sheet. I suspect its lowly rating has a lot to do with two things: its history of 2008, and also it issuing a profit warning last Spring, shortly after its IPO. the Market is always brutal on such things, as I have also learned with LAKE recently.

alan000@yahoo.com

22nd Jul '16

Tomorrow is the last day of their Financial Year, and there must be a good chance of a pre-close Statement next week. I am expecting them to report EBITDA of £18m, and at current levels the Enterprise Value is less than £40m. I am not sure I have ever seen a share valued as cheaply as 2* current year EBITDA. A dividend yield of almost 10%, where that dividend costs them £5.6m, very well covered by an EBITDA of £18m and also by cash on Balance Sheet.
Interesting to not that the Chairman and a "related party" to the Chief Exec bought shares last week.

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SCS Group price fall

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Whitbyview

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