SCS: Sofa so good baby

22nd Jan '18 by mojomogoz

10 comments 4321 reads

The end is nigh!

You know this right? Particularly if you sell soft furnishings to beleaguered lower income Brits. No brainer...to think otherwise makes you fo shiz a few tablespoons short of a teaspoon. Well baton down and button up...

SCS (LON:SCS) is a great stock and company. Yes, I mean Tony the Tiger grrrrrreat! Its not in the most glam sector and it ain't going to blow the bleeding doors off like a hot cakes online retailer (though many of those will burn up or fade away burning your capital for the journey). But is priced like it can't deliver anything whereas the reality is it will deliver more than enough. Whereas how many moonbeams are there for the online girls and boys to collect? And even moonbeams have a terminal growth rate....which cold dished reality could feel like a bit let down.

So, come on down and get your bargain SCS (LON:SCS) now. Okay, there is a the trading update for Christmas and key new year sales period to come at the end of the month. I don't have any good foresight on this however my guessestimate is further deterioration in the HoF based franchised outlets as HoF had a tough time whilst holding the LFL previously reported in SCS stores steady-ish at 3.6% as reported in AGM statement in Nov (that figure included 6.4% LFL decline in HoF stores which represents 6.2% of total order intake).

Worst case scenario is that there is a private equity take out or management lead LBO (that won't happen whilst current long standing CEO is there but could happen with the replacement).

Stockopedia does a good job on the financials as a summary as this is real straightforward crisp and clean stock from an accounting perspective. Net cash for FY 2017 is about £10m over stated as a result of timing differences in working capital so EV/EBITDA is more like 3.4x rather than 2.9x.

I've held the stock for about 18-24 mths now, read the historic reports and had a call with the CFO last Friday to improve my understanding of some things. It reassured me that this is a well run business by guys that know their customer and how to run the business.

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matylda

2nd Oct '18

FinnCap have initiated coverage here today but as yet have not issued a note.

mojomogoz

Groovy. If you read give us the highlights (I hardly ever read broker notes, maybe I should!).

A speculative bit of me wonders if this coverage is initiated by forthcoming corporate action with their cash pile that...hopefully nothing hubristic and more a huge buyback program. Like I said...speculative, not informed.

Sure thing

abtan

17th Oct '18

I just took a look at the FY results released a few weeks ago by SCS (LON:SCS)

Everything looks almost too good to be true, even when factoring in:
- customer deposits of £12.2m (which was stagnant vs prior year ie YOY cash increase is a "real" cash profit)
- the possibility of losing HOF concessions

So in light of recent fraudulent accounts from a certain cake shop, I thought I would take a look at interest received in the year:

£205k interest on cash balances of c.£44m = 0.45%

Surely a company with such a high cash balance would get a better rate than I get at my local Nationwide? Does anyone else think this looks odd?

Blissgull

Looks about right to me. This is what Barclays offers business customers.

https://www.barclays.co.uk/business-banking/accounts/compare-accounts/

Remember the SCS figures cover a period prior to recent rate rises.

Thanks for that. Very interesting and I had no idea.

Looks like their bank is Lloyds, who provided an interest rate of 0.05% for most of 2017-2018, which leads me now to question how they received so much interest!

On c£44m cash balance, a 0.05% interest rate works out at £22k for the year, rather than £220k reported.

https://commercialbanking.lloydsbank.com/commercial-terms/interest-rates-and-charges/interest-rates/

18th Oct '18

SCS (LON:SCS) is too good to be true...but it is true ;)

They went under in 2008 crisis. They were caught out by terms of a financial product and it being pulled on them by financial partner under duress (credit insurance I think) which then unstuck their financial offering with customers. This came on top of tough (but survivable in isolation I think) trading. They had also expanded too quickly opening a lot of shops a couple of years beforehand. Perfect storm and out they went bought for nothing by Sun Capital.

Sun refloated them a few years back. Same management in place and same sort of product but with an improved 'negative working capital' operating model. Sun also did Bonmarche Holdings (LON:BON). Interestingly, both companies were IPO'd well IMO. BON looks interesting too but I prefer SCS believing it to have a more durable and defensible against competitors business model.

They sold cheap sofas (I jest council estate chic) then and they do the same now. Most investors have some money and "aspiration", be they professional or private, and they probably just don't vibe the cheap necessity of SCS.

What will it take for market to give SCS a bit of love? Dunno. They have been executing very well in tough environment and get no attention. Obvs they could use the cash pile...and they will at some point. I see using the cash as a drive to double earnings. Then they have self generated growth on top of that both LFL and 30 target areas they want the right site (based on their analysis of their customer profile).

All in, I think I can get a triple without multiple expansion with much lower downside risk than most other stocks. What about the next half year performance? Well there's got to be a chance that earnings are flat or down after a good run in a tough environment. Consensus has them down 2.5% for FY19. Perhaps the stock will get cheaper as a result. This would be an unbelievable gift and I'd probably break my weighting limits to go for more.

Or I may just be deluded :)

Interesting thoughts.

Are you concerned by the potential loss of HoF concessions?

By my rough calculations, and all else being equal, a loss of 7.1% of the top-line would lead to £3m PBT for the FY, or maybe closer to £5m without the £2m in performance-related bonuses that were paid out in 2017/18.

Still worth a buy rating IMHO, but the SP would probably drop on negative news.

I'd like a bit more info from them on HoF concessions in general. It made positive EBITDA contribution in 2016 for first time (2014 being initial development) and with c.10% growth in 2017 from HoF that went more positive. So the 10% step back in 2018 suggests back down closer to breakeven (going backwards is always more painful).

Costs of HoF have been expensed and then ongoing profit sharing agreement. As it stands they lose much more revenue than profits from reversal in HoF as they can cut relatively painlessly. I think mgt are very focused at SCS and will not let the cost of this drift too much...that said, HoF concessions were good idea (different demographic and location from retail park stores) so its possible they hold out on them with a bit of pain for a bit of time.

Note, that H2 2018 saw a slow down in negative sales pattern from HoF compared to H1 2018. Doesn't mean much but means not accelerating bad at the moment.

PS when I said triple I meant on a 3-5 years horizon factoring in cash generation and dividend. SCS isn't a moonbeam stock so not likely to suddenly catch fire although announcement on cash would move things a lot.

PPS despite my positivity on stock - I like to try and be longish horizon and not worry short term (I'm not a good trader on sustainable basis) - there's a decent chance of disappoint for H1 19 results due to tough comparison, tough UK retail and HoF. If you want your patisserie and eat it then you may get a great buying opportunity in next 6ish months

SCS: Sofa so good baby

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Mojomogoz

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