Small Cap Value Report (1 Feb 2017) - BOO, EPWN
Good morning,
Boohoo.Com (LON:BOO)
Let's start with a few comments on the latest Dispatches TV programme. I think it's a good thing that Dispatches is keeping the pressure on the rag trade - because it's notorious for having a supply chain where conditions for workers can often be very poor.
Warehouse management procedures have come under criticism for Sports Direct, JD Sports, and now BooHoo. The trouble seems to be that the workforce is transitory - with agency temps being extensively used, to boost the workforce during peak times.
Overall though, despite the TV peoples' attempt to dramatise things, BooHoo didn't seem to be doing much wrong. Specifically, these struck me as the main negatives;
- Docking pay by 15 mins for being 1 min late - clearly unfair, and should not happen.
- Long queues for bag-checking, and workers unpaid whilst waiting - again, clearly wrong, needs to be rectified.
Other than that, the following points were presented as terribly negative, but which strike me as being par for the course;
- Long shifts (12 hours), involving extensive walking - that's what warehouse work is like. So it's only suitable for people who are fit & active.
- Workers being pressurised to meet targets - it was filmed at peak trading, and everyone would understandably be under pressure to reach peak productivity.
- 3-strikes and you're out, with strikes being for quite trivial things. The company has denied this is their policy. However, when there is plenty of supply of willing agency workers, employers will naturally keep the most productive, and want the least productive replaced.
It's a fine line between urging staff to work hard, and crossing a line into bullying & maltreatment. The BooHoo supervisor filmed by Dispatches actually seemed quite polite in the way he spoke to agency staff, I thought. Certainly I've seen, and been personally on the receiving end of far worse treatment when working in warehouses! Bullying supervisors are a widespread problem.
This type of Dispatches programme can cause a lot of brand damage, so I think it's important that BooHoo properly reviews how it's treating agency staff. Overall though, on my visit to BooHoo HQ last year, I was highly impressed with how professional everyone was. So the culture of the company is good, in my experience.
The issue of goods being manufactured in factories where workers are underpaid, is an ongoing problem for the whole industry. The big problem is that factories often take orders, then sub-contract the manufacturing. So buyers often have no idea where the garments have actually been made. Suppliers tend to fill in paperwork with what they know the buyer wants to see, irrespective of what reality is. This was my experience from working in the sector throughout the 1990s, and I doubt much has changed.
It's important that programmes like Dispatches keep the pressure on the retailers, as otherwise they'll slip back into complacency. Overall though, I reckon BooHoo came out of things reasonably OK - a few tweaks needed, but nothing too bad. The share price said the same thing, and hardly budged.
BooHoo has put out a detailed press statement here.
Right, on to today's trading updates & results. There's nothing that particularly interests me, but I'll go through the motions.
Epwin (LON:EPWN)
Share price: 102.75p
No. shares: 141.5m
Market cap: £145.4m
Trading update - for the year ended 31 Dec 2016.
The summary sounds alright, but note the challenging market conditions comment;
The Group's profits for the year ended 31 December 2016 will be in line with expectations, with continued strong cash generation in challenging market conditions. The performance of recent acquisitions continues to be encouraging.
Various other comments are given, but this one caught my eye on rising import costs;
The long term impact of the outcome of the EU Referendum on consumer confidence and demand remains unclear, but input costs have increased as a result of the weakening of sterling since June 2016 and the Group is continuing its efforts to mitigate this.
That shouldn't come as a particular surprise to anyone. Investors should already be well aware that the UK is entering a period where we'll have a burst of higher inflation. The same thing happened in 2008 when sterling devalued sharply.
Valuation - this appears a decent value share - with a low PER, and high divi yield:
The trouble is, that Epwin's sister company, floated at the same time, Entu (UK) (LON:ENTU) also looked similarly good value. The trouble is, Entu has since performed extremely badly. So it's difficult to avoid the conclusion that Entu might have been hung out to dry, with the profits instead going to Epwin (which supplies Entu).
All in all, very much a reminder that incestuous relationships between listed companies are not a good thing. I remember a fund manager telling me at the time that the structure of the Epwin/Entu float looked horrible, and he was keeping well away. I should have listened to him. Instead I got sucked into the value trap Entu, and took a nasty loss.
Once bitten, twice shy, so Epwin is not something I would buy on principle now. Although as the graphic above shows, it does look cheap, providing nothing goes wrong in future.
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42 comments
Looks as though the Boohoo.Com (LON:BOO) bid to acquire assists from the Nasty Gal estate is going through uncontested. RNS out this morning.
http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BOO/13117798.html
Gus.
I think everything has to be done very efficiently within a warehouse.
BUT the staff have to be treated fairly and humanely at all times.
In my experience, things can easily cross the line.
So BOO have to be 100% sure that they're the right side of the line, all the time. That needs mgt focus. Otherwise brand damage is bad.
PP.
Paul,
What are your views on PMG & ETO?
Clothing Manufacturing IS a production line job these days , so lateness does have knock on effects if more than a few minutes.
Boohoo were not manufacturing on the site subject to the documentary.
Some good points made earlier.
Boohoo do not run a car production line, where everyone needs to start on time so the parts are fitted in the correct sequence (try fitting the carpet after the seats & rubber door seals when making a car).
Since they clock in, clock out and monitor people's pick rate electronically, what is the problem with slight flexibility where people can clock in a few minutes either side of the target & the same for clocking out ?
I worked for many years in the clothing manufacturing industry. Pilfering has always been a big problem , from petty pilfering for family and friends up to stealing for sale on to dealers.We only searched when we had reason to suspect someone smuggling out of the factory in their bags or clothing , but every now and again we got nasty shocks when police or outside agencies caught staff who had upto then "got away" with it - and not only the lowest paid.
I don't agree with searching every day but spot occasional random searches were a big deterrant. and certainly staff should be paid whilst waiting .Branded goods are a big target as they command a good price in the "no Questions Asked" sector of retailing.
Just my experience at the sharp end.
Delighted to hear that TW is 'exposing' BOO again. The SP has come a long way since his last spat which I think also involved Paul.
It re-inforces my hold position on the stock - you only have to look at ASC to accept the valuation for what it is and continue to hold for long term gains. Until there is a shift in something fundamental such as consumer buying patterns or some change in the US, just ride the wave!
"It exposed Boohoo.com (BOO) and to a far lesser extent ASOS (ASC) for the way they treat management. Boohoo was truly shamed".
Read it carefully. I think perhaps Tom is confused?
For the sake of fairness, here is a link to another's take on the Boohoo.Com (LON:BOO) Dispatches programme (which I should say I did not watch).
Not recommended for holders of a nervous disposition.
http://www.shareprophets.com/views/26865/tom-winnifrith-bonus-bearcast-boycottboohoo-the-shameful-and-unacceptable-face-of-capitalism-exposed
Hello Paul,
Thanks for your comments on Epwin and Entu. For my own part, the reason I invested in Epwin but not Entu is that Epwin serves trade as well as retail customers and seems to have a strong position within the trade. As far as I am aware, Entu has a much heavier reliance on retail customers. My perception is that businesses serving trade customers often seem to do well (this is why I hold Howdens) but I am not sure why this is. Perhaps there is less of a need to spend on advertising, marketing and glossy premises and customers tend to be more loyal? I also like Epwin because its merger with Latium was subject to a Monopolies Commission enquiry which would indicate to me that it must have a good competitive position. Also the company appears to be quite a straightforward business which is easy to understand.
I pity anybody who took part in the Autins (LON:AUTG) IPO as recently as last August. Already we have a profit warning and the sudden departure of the Chief Executive just nine months later:
http://www.investegate.co.uk/autins-group-plc--aut...
Share price down over 30% at the time of writing.
Interesting bit of commentary over at ShareProphets:
http://www.shareprophets.com/views/26906/autins-group-five-months-in-and-huge-revenue-warning-and-ceo-leaves-under-cloud-hmmm
Steve
Disclosure: No position
Interesting how easily we can jump to conclusions without the full picture. So why has the CEO quit? What is his state of health? Has this been caused by business pressure? Who is/was the driving force behind the business?
May I suggest this may not be all it appears on the surface? I don't know the details but the likes of shareprophets wouldn't let a bit of humanity get in the way of an opportunity to slate someone would they?
Nothing wrong with be deducted 15 minutes pay for 1 minute late. Note the "clock" will not be their work station, it will be at an entrance area, they still have to take off their outdoor clothes, go to the loo, get a coffee, chat to their friends. The start time is at their point of work, the clock is to manage that they struggle to manage their own time control.
Queuing to leave is just crazy, if management want to do this weird practice then they need to resource it properly or pay the people to be searched.
With Boohoo.Com (LON:BOO), Lots of people saying that docking 15 minutes pay for being 1 minute late is not acceptable. OK, so when is it acceptable - 2 minues late, 3, 10, 20??
Presumably you're never going to get everyone to agree so the bar has to be set somewhere.
Hi Laughton
If you had a excellent punctuality record and always on time great, but Every now and again you might get caught up in traffic, breakdown or late for no direct fault of your own, in which case this seems very unfair.
I've never heard of this before, seems quite an aggressive rule.
Sean
The point is that if you're on minimum wage and you're docked 15 minutes pay for 1 minute late that can take you under the minimum wage. And if it does it's not a question of whether it's morally acceptable or not, it's illegal.
It's not obvious to me that Boohoo.Com (LON:BOO) has actually done anything illegal, but it's perhaps noteworthy that they're now high profile enough to attract media attention. If I were a shareholder at this heady multiple I'd want to see the directors being proactive and making sure that there really are no issues even if that meant sacrificing a bit of margin, otherwise the dreaded three ring circus that is a Parliamentary committee surely beckons ...
timarr
But Boohoo.Com (LON:BOO) says that they pay ALL their staff more than the National Minimum Wage and "on average 12.50% above the National Living Wage" which in itself is above the NMW - so the 15 minute pay for 1 minute or more late is unlikely to cause any legal problem.
Only playing Devil's advocate here.
How many minutes late would you think should be allowable?
i think it can be managed in a more sensible manner most places have some form of clocking in cards/system, now if you start 10-15 mins early no one will batter and eye lid but its soon noticed if your 1 minute late.
if you clock on early by 10 mins this minutes should start to be accrued, towards their normal working day/week. Not only does this incentivize you to get work on time but it allows flexibility as you can still complete your required hours.
Sean.
Trouble then is that the person or machine doing the job before you "on the production line" hasn't clocked on 10 minutes early so there's nothing for you to do until they start at the correct "start" time.
Presumably "to complete your required hours" you would then be in favour of this person clocking off 10 minutes early on this day or some other day in that week or month in order that they don't work more hours than they should?
As one quite clever current TV advert says "that way madness lies".
yes I agree it gets tricky when you manage people on production lines with strict shift patterns. it will have to be tailored to suit.
However the frustrating part is these decisions are made by people not on the minimum wage. Treat staff fairly and reduce the chance of damaging their brand/reputation.
Virgin has created an excellent reputation for treating the staff well across the board, and as a whole they have created a very powerful brand behind it.
With Boohoo.Com (LON:BOO), the main factor to consider is that this is an international company and part of the investment case now is the very high levels of revenue growth in the USA. Frankly, US consumers aren't going to give two hoots if people in Burnley are working like slaves (I don't think they are by the way), nor are they going to have seen Dispatches.
Hi Paul
As ever, the insight you provide above and beyond the financial stuff is always fascinating and useful! I always wonder who would have the more impact on a story like Boohoo.Com (LON:BOO) (and Amazon, sports direct etc) - those that want better treatment for workers, and those that like cheaper goods.
Anyway, can I second the request for a view on Staffline (LON:STAF) please - you ran an excellent interview with the CEO a while ago, and I'm not sure the share price has moved that much since, particularly given the latest results. Is this still a hangover from Brexit and worries about Eastern European workers, or more to do with the uncertainty about renewal of contracts from Government? I still hold, but had thought the share price should be higher than this....
Thanks
Dave
I have bought some Epwin (LON:EPWN) this morning. The trading update is not that informative but they have been talking to their two house brokers (Panmure Gordon and Zeus) who are both now estimating net debt at around £21 million for end 16 ( versus nearly £30 million at the half year). Assuming that is correct, then there has been very strong cash flow generation in H2.
I saw a report that a recruitment business has been started up (can't remember the name) to help Eastern European workers find jobs and resettle outside the UK. Also the number of EU nurses registering here was down from 1,304 in July to 101 in December.
So any business that is depending on plentiful cheap Eastern European labour is in for a mighty big challenge in my view. They may even have to treat staff properly to retain them.
Distribution centres, home delivery services, and the hospitality sector come to mind.
I agree with Paul. Yes pay for extra time queuing for necessary checks and clocking out however the rest is legal and goes with the job. What does one really expect for a stock picker job? The comment 'they only pay minimum wage' did make me smile! As for laying off staff, what are they supposed to do? It was Christmas and that's what most companies do, Argos, Tesco etc.
The thing is that thanks to EU immigration companies have been able to treat low skilled labour as a commodity to be driven hard and hired and fired at will. I believe that experience drove a lot of the resentment that led to the Brexit vote.
Shutting down immigration, or even having it go into reverse, will force companies to compete for labour, driving up pay and ensuring they have to treat people as people, not commodities.
That will be a big win for the low skilled and a potential hit for the owners of companies that rely on them. I'm re-thinking if I should continue to hold JD Sports and Boohoo for example.
John
I totally get that. We are in construction and cheap European labour has crucified not only the skill but the wage. The problem is while it's allowed there's noting that can be done and they are working in line with requirements.
Yes you have the nail on the head there. Blair's open immigration policy made him feel good about himself but has had the effect of destroying the living standards of the people he was supposed to represent (protect). In essence he also finished off the residual powers of the Trades Unions via support for globalisation. It is strange how the impact of legislation like many other things in life has the opposite effect to what was originally intended.
Flapping about the availability of cheap migrant labour is a bit nonsensical. If there is a need it will be filled. Across the last century we saw (in rough order of arrival) the Irish, East European Jews, West Indians, Indians, Pakistanis, assorted Eastern Europeans. This is one area where supply and demand really works (at least for employers).
(Do you really expect the numbers of nurses registering in a summer month to be the same as at Christmas? Any shortage here will be filled from Ireland and Asia, as it traditionally has been since the NHS started).
Hi Paul,
Could you take a look at Wizz Air Holdings if you get a chance? It is larger than your usual size but they put out a Q3 update today that seems to be a mild profit warning. Can you explain what the very large exceptional finance income is? Profit for the period has doubled but underlying PBT has dropped by 21.5%.
I think you will also appreciate the clear annual guidance (previously 245-255m, now 225-235m), hopefully this becomes the norm.
Thanks,
Pete
Does staffline (STAF) look intresting to you Paul? Its certainly interests me now that the market looks to be waking up to last weeks results and has started marking it up to where i would consider fairer value (£13-14). I know it reported last week but if its quiet and your not too busy im sure readers here and myself would love for you to share some thoughts.
Excellent work i am a huge fan of what you do here.
Damien.
How did your meeting with MYSL go?
Yes I hold some 32Red (LON:TTR) as well and would be interested in your opinion on today's figures.
Good morning Paul,
Is there any chance you could provide some commentary on 32 RED. They have just reported Stella gains but the big institutions refuse to buy and move the share price.
Many thanks.
Morning hynesjp,
Sure, I'll take a look at 32Red next.
Regards, Paul.
Ok,Paul,but BooHoo really does look expensive now.Another negative from the report was that they hire staff from Eastern Europe over the Christmas period and then fire a high proportion of them in January,but fail to warn them that this is likely to happen.
Hi AlanJenkins2,
Yes I agree, Boohoo.Com (LON:BOO) shares do look expensive now.
Mind you, the company has now established a track record of beating (thrashing actually) forecasts. So the apparently expensive PER a year ago, was based on forecasts that were far too low.
Plus, there's scarcity value. There are only really 2 decent quality fashion etailers listed in the UK - Asos (which struggles with low margins), and BooHoo.
The high PER also reflects the international expansion potential.
The price is too rich for me now anyway, so I don't hold any personally (directly), but do hold some indirectly via my local share club. With the club, the members decided to take out our cost price, and just run the profit forever. So far that's been a great strategy!
Regards, Paul.
Thanks,Paul !
While Boohoo.Com (LON:BOO) has a relatively high PE it is also growing at a very high growth rate and looks likely to continue to do so for some time. It is very hard to judge the valuation on the PE alone as you have to take account the compound growth which can have a drastic affect on the valuation, particularly if it is likely to continue above market average in the long term. I believe that most would underestimate the impact of compound growth on valuation.
I was playing around a bit with the valuation tools on Stockopedia (DCF and Graham rule of thumb). These are obviously v sensitive to the growth assumptions you put in so there is a big risk of putting rubbish in and getting rubbish out but it can give you an idea of how different rates of compound growth might affect valuation. The valuation is obviously v volatile if it grows at almost 100% in a given year - making predictions quite difficult! To me it seems that Boohoo would be fairly valued on quite reasonable assumptions for future growth though
The big question for valuation is how long do you think it will keep growing for (and at what rate and with what likelihood)? I think if it can do a CAGR of more than 30% for the next few years or a significantly higher rate than the market in the long term it seems reasonably valued. This seems likely to me. I believe its performance over the past couple of years suggests that its competitive advantage is growing and it has huge international prospects so I think it is still cheap. The other reason I think it is likely to be cheap is that many investors will be biased in their judgment from just looking at the PE ratio and share price chart and assuming it must be expensive.
Boohoo response to the C4 program here :
http://www.boohooplc.com/~/media/Files/B/Boohoo/documents/statements/boohoo-press-statement-31-01-17.pdf
Thanks Glaws2,
We crossed in the post! I'd already added in that link, but thanks anyway.
Regards, Paul.