Good morning, it's Paul here with Thursday's SCVR.
Please see the header above for company announcements I'll be reviewing today.
Comments section - I don't moderate the comments, that's done at Stockopedia HQ. They're a lot more lenient than I would be. This is not an advfn or LSE free-for-all, we like to keep the comments here courteous & constructive. If someone else posts something idiotic, please just ignore it. Replying tends to start off an unwelcome chain reaction. Many thanks.
Estimated timings - I got bogged down in JOUL, so will carry on until about 3-4pm to cover everything else.
Update at about 16:40 - today's report is now finished.
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Joules (LON:JOUL)
Share price: 98p (up 4% today, at 08:57)
No. shares: 108.1m
Market cap: £105.9m
Annual Results for the 53-week period ending 31 May 2020
Established in Britain by Tom Joule three decades ago, Joules is a premium lifestyle brand with an authentic heritage... a true multi-channel lifestyle brand; its products are available through its e-commerce websites, retail stores, at rural shows and events and wholesale channels both in the UK and internationally....
Joules carefully designs and sells clothing, footwear and accessories for women, men and children. The business also sells ever-growing collections of homeware, eyewear and lifestyle product ranges through both its licensing partnerships and 'Friends of Joules', the brand's online marketplace that brings together hundreds of creative businesses to give customers everything they could ever need for a contemporary country lifestyle.
Background - This is an interesting share to me (no current position) because it sells about half of its product online. Next (LON:NXT) showed us how this is the way to go. Next is a rare success story in retailing, because it migrated so much business online (more than half).
Joules messed up its website distribution, warning on profits (significantly below mkt exps) which I reported on here, on 10 Jan 2020, hitting the share price 21% down to 179p.
Then covid hit of course. It announced a £15m placing, at 80p per share, and £15m extension to bank facilities, which I covered here on 3 April 2020.
The stores had to close, but online trading was described as better than revised expectations. Regular updates have been provided throughout the crisis. All stores closed for lockdown on 23 March, as did most wholesale customers' stores.
Therefore, these results will include over 2 months impact of covid, hence I don't think there will be much use in analysing the figures beyond a brief overview.
The Group recorded a loss before tax, pre-IFRS16 - Leases and exceptional costs, of £2.0 million (FY19: £12.9m profit). The statutory loss before tax for the Period, including the impact of IFRS16 of £1.4 million and exceptional costs of £21.5 million, was a loss of £25.3 million (FY19: £12.9m profit).
Interim results showed an H1 underlying profit before tax of £9.7m (down from £10.7m H1 LY), There is an H1 seasonal bias. Assuming a further fall in H2 trading (because they messed up distribution over Xmas), then I estimate full year profit would have come in around £10-13m without covid.
The actual figure for FY 05/2020 is a loss of £2m, therefore covid seems to have hit profit in H2 by £12-15m, by my rough calculations. That seems a lot, given that the company should have received furlough money to pay staff whilst the shops were shut. Although maybe this isn't all down to covid? The company was reporting challenging UK market conditions prior to covid, plus it had the stock availability internal problems. So we mustn't allow covid to gloss over the existing problems.
Put another way, the placing of £15m has put the company's finances back to where they were, had covid not happened. Any further losses after the 31 May 2020 year end would start denting the balance sheet again.
There's a large exceptional charge of £21.5m, which relates mainly to writing down the leasehold right of use asset, and the book value of fixed assets, for stores which are trading at a loss. These stores will be closed or viable rents renegotiated when break clauses allow.
Dividends - not declaring a final divi for FY 05/2020. Also it does not intend paying dividends in the new financial year, FY 05/2021. Not a share for income seekers then, at least for now.
Outlook - given that FY 05/2020 has been a write-off, partly due to covid, how are things looking now?
... we have performed ahead of the Board's COVID-19 base case since the UK entered lockdown in terms of both trading and the Group's liquidity position.
...The Group's e-commerce channels already represented half of total retail sales prior to the impacts of COVID-19, and we anticipate that this will continue to increase in the years ahead.
This makes me wonder if it really needs the shops at all? Could it become an online only brand in future? How difficult would it be to get out of the shop leases? That could take years.
... more than a third of our portfolio has a lease event within the next 18 months, with an average lease length of less than three years. We will continue to review the appropriate shape of our store portfolio and lease agreements.
That's excellent news. So the company will be able to exit from its stores fairly easily & quickly (3 years is nothing, when trying to dismantle a retail estate). Joules will be able to give each landlord an ultimatum on lease expiry or break clause, naming the (greatly reduced) rent it is prepared to pay, or have the keys back. This is such an important point, it's worth stressing.
There are mixed messages about how the stores are performing since re-opening. In the outlook section it says;
On 15 June we were pleased to commence a phased re-opening of stores after a near three-month period of closure. Whilst it is still early in the process to fully predict to what extent store footfall and sales will recover...
Yet it says something much more positive in the headlines;
Encouraging recent trading reflects the strength of the Joules brand with continued strong e-commerce demand during the UK lockdown Business well positioned to navigate existing and potential COVID-19 challenges:
· Trading performance ahead of management's expectations1 after the first nine weeks of FY21
- E-commerce demand2 up more than 70% on the comparable period in prior year
- All stores now re-opened with overall performance ahead of expectations
- Wholesale performing in line with expectations
The footnote says that management expectations are the base case scenario used in the going concern note.
Also note that "demand" is defined as gross sales, ignoring customer returns, which is imprudent in my view.
Liquidity - this is self-explanatory. Deferred tax & rents are disclosed, which is essential information that all companies must provide, as these are materially boosting cash balances for many companies;
Net cash at the end of the Period was £4.5 million (FY19: £5.8m). Cash balances were £26.2 million (FY19: £16.0m) and Group borrowings were £21.7 million (FY19: £10.2m).
The Group's total liquidity headroom at 31 May 2020 was £52.5 million, comprising £26.2 million cash balances and £26.3 million undrawn committed financing facilities.
To preserve cash and improve the short-term liquidity position in response to COVID-19, the Group agreed the deferral of certain liabilities falling due in the final quarter of the financial year with HMRC and with landlords. At 31 May 2020 the total amount deferred under these arrangements was £6.7 million (FY19: £nil). The Directors anticipate that these amounts will be repaid over the period to May 2021.
Overall then, it looks a healthy liquidity position, providing the bank facilities remain available.
Going concern note - worth reading, as it contains interesting information.
Scenario planning;
Base plan ... It reflects phased store re-openings from mid-June 2020 through to mid-August 2020 with the re-opened stores initially trading significantly below the prior year, improving to 75-80% of the prior year's sales level by the end of FY21, with modest growth thereafter.
As I suspected, the stores are probably trading a long way below prior year at the moment, but this seems to be glossed over in the rest of the narrative.
Downside scenario - the 'Base plan' adjusted to reflect a slower recovery of the Group's stores channel with total store revenues only achieving approximately 60% of the pre-COVID-19 levels by the end of FY21, and a deterioration in the wholesale channel receipts with receivable days more than double the level of FY20.
It also outlines an even more extreme downside case, called the "Stress test scenario", where stores would be closed again due to a second wave, and no Govt support measures were given.
It passes these tests comfortably by the sounds of it;
Under the Downside scenario, the Group has more than £25 million available liquidity headroom through-out the period under consideration and has EBITDA headroom of £2.9 million against its first covenant test arising in the period with headroom increasing further for the second covenant test arising in the period.
The Group would also remain within its borrowing facilities and comply with covenants under the Stress test through this period.
That sounds fine to me. The auditors require this information, in order to sign off the accounts on a going concern basis - the fundamental test is that the Directors can demonstrate that the business can remain solvent for at least 12 months after the signing of the accounts.
Balance sheet - looks OK, but not particularly strong. NAV: £42.3m, less intangibles of £20.5m = NTAV £21.8m.
I wonder if the cumulative £13.8m spent on its new freehold HQ might be a vanity project? Also do people need to come into the office, if work from home becomes a long-term thing?
My opinion - I've spent far too long on this. It's a simple company - designing & selling clothes, but the accounts seem really complicated. After spending a couple of hours going through the figures, I still have absolutely no idea what level of profit or loss that the company might achieve in the current financial year!
Liberum to the rescue, with an update note available on Research Tree. This clarifies a number of things I was unsure about, so it's really helpful.
Forecast EPS has been raised today, from 2.9p to 3.6p - PER of 27.2 - that's high because FY 05/2021 will still have some impact from covid disruption, so I'm relaxed about that.
That rises to 6.8p the following year, pulling the PER down to 14.4 - which looks sensible.
Overall, I think the current price looks about right. Although the impairment charge is called non-cash, my view is that the company is still, in cashflow terms, carrying some heavily loss-making (in cashflow terms) shops, and will have to keep funding those losses until lease expiry/break clause. That's real cash going out of the door, whatever the accounts say. The average lease length may be 3 years, but what if the biggest loss-makers have leases 5 or more years out? Averages can conceal the most important information. Disclosures on leases are absolutely hopeless right now. IFRS16 has made accounts far more difficult to follow, without giving us the key information we actually need - i.e. when do the leases expire on the heaviest loss-making sites?
Long-term, once problem leases have expired, and Joules becomes more & more an online business, then I think it would become an increasingly attractive investment. But there's quite a bit of legwork to be done, to get to that position.
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De La Rue (LON:DLAR)
Share price: 145p (up 4% today, at 11:15)
No. shares: 306.6m
Market cap: £444.6m
This group prints high security things like banknotes, security markings to verify product authenticity (e.g. cigarettes), etc.
I did some research on it earlier this year, and came to the conclusion that it seems to be undergoing a remarkably good turnaround. Last year it was looking a basket case, with poor trading, and a dangerously weak balance sheet. Things are looking very much better now, and it did an equity fundraising at 110p to fix the balance sheet earlier this year. The SFO investigation was closed, making it easier to sleep at night as a shareholder here. Annoyingly, I had to cut a few positions lately to meet a margin call, so it's not currently in my portfolio, but I want to buy back in when spare funds appear from somewhere!
This is what is says today;
The Board's expectations for 2020/21 remain unchanged from the full year results announcement issued on 17 June 2020.
The £100m equity capital raising, which completed on 7 July 2020, will strengthen the Group's balance sheet, enabling De La Rue to deliver the Turnaround Plan and create value for its employees, customers, suppliers and shareholders.
In Currency, De La Rue continues to experience strong demand and has been awarded contracts representing approximately 100% of its available full-year banknote printing capacity for Financial Year 2020/21, an increase on the 80% of capacity announced at its trading update of 1 June 2020.
The first two sections are fine, an in line update, and recap on a fundraising that we already knew about. So nothing price sensitive there.
It's the third paragraph above that I'm scratching my head over. Is this good or bad? It's good that more contracts have been won, but does that now mean customers have to be turned away if they submit new orders? Why is capacity constrained? How much would it cost to increase capacity, and on what timescale?
My opinion - overall then, I'm not sure how to interpret this. What do readers think? I suppose being maxed out from customer demand is a nice problem to have.
From my point of view, the fact that I keep selling this share when I have margin calls, probably means I don't have enough conviction in it to buy back in. I might give my pal a ring, who's researched it to death, and see what he thinks, before buying back in again. I seem to recall some of the excitement was due to other products, like cigarette security features, which apparently is a big growth area.
Sorry this is a bit vague, sometimes I find it very difficult to keep on top of so many companies, and lose the plot a bit.
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Fulham Shore (LON:FUL)
Share price: 6.75p (up 10% today, at 11:57)
No. shares: 573.6m +36.0m new shares = 609.6m (6.3% expansion of share capital)
Market cap: £41.1m
Trading Update & Proposed Fundraise
This is a restaurant group, mainly "Franco Manca" pizza, also "The Real Greek". Both are excellent casual dining chains, in my view, with an everyday good value pricing model (no discounting or gimmicks).
By the time fundraisings are announced, they're a done deal. I got wind of this fundraising about a week ago, but because I respect the rules on inside information, I kept silent about it here, and everywhere else. It infuriates me when journalists or bloggers discover some inside information, and then broadcast it far & wide. That seems completely wrong to me. I don't like the way fundraisings are done in secret, with the shares continuing to trade, but that's the way the system works. In my view the share should be suspended the moment a fundraising starts, in order to prevent a false market developing, and insider dealing (things inevitably leak) but that's a discussion for another day.
Looking first at today's trading update, my summary of main points;
- Nearly all restaurants now open - early signs "promising"
- Sales rising week on week since re-opening began (4 July)
- Capacity reduced to 60-70% due to social distancing, partly offset by increased delivery & takeaway
- Cost reductions - rent reduction/deferral/waivers
- London sites in West End & City locations - a problem due to absence of customers, won't re-open yet - will impact current year FY 03/2021 performance
- Sharing half the VAT cut with customers. Participating in Eat Out to Help Out scheme - should boost trade
Current trading - key information here. This looks OK to me, given that footfall is well down, and should improve over time, assuming no further lockdowns;
In the four weeks since 6 July 2020, like-for-like restaurant sales at reopened sites were approximately 72 per cent. of the equivalent weeks in the previous year.
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Fundraising - this is unusual, in that it's only a small equity fundraising, plus a much larger increase in bank facilities.
Equity - 26.14m new placing shares, 9.8m subscription shares for Directors = 35.9m new shares at 6.25p = £2.25m before fees. This looks absolutely fine to me, because the price was a 2% premium, and dilution is very small (share count increased by only 6.3%). As major shareholders, I'm guessing management want as little dilution as possible.
Debt - existing net debt at 5 Aug 2020 was £8.9m (tax/rent deferrals will have helped this figure, so underlying position will be worse). Today it announces;
New £10.75m loan under Govt-backed scheme, CLBILS (repayments due in years 2 & 3)
Existing £15m facilities with HSBC extended from Mar 2021 to Mar 2022, with waiver of certain covenants (probably Net Debt: EBITDA, is my guess, that's usually the key covenant)
These new banking arrangements, together with the Fundraise, will give the Company substantial headroom of at least £18 million over its current net debt.
That's really good in my view - that the bank is extending the existing facilities, as well as the Govt-guaranteed facility in addition, and only a small equity raise was needed to secure this, demonstrates an excellent bank relationship.
These facilities are well above what's needed for survival, so it primes the pumps for continued expansion. The deals likely to be available from landlords, could be outstanding. So paradoxically, this is an excellent time to be expanding.
My opinion - I've long been positive about this group. It's well managed, and has a genuinely good, and differentiated, value for money offering. This fundraising involves little dilution, and provides plenty of firepower to get through this crisis, and fund renewed expansion.
BUT, is this the best place for my money? I'm not sure it is. FUL is definitely going to survive, in my view. But there's also likely to be renewed competition once weaker players have left the market, and the empty sites are refreshed under new owners, operating under long rent-free periods, and low rents. As sector expert Mark Brumby of Langton Capital points out, it takes many years for capacity to actually disappear, since a closed restaurant becomes a new restaurant usually. I saw evidence of that last night when wandering around Bournemouth - one tatty old cafe was having a sleek new fascia installed, and is to become a Thai restaurant. Likely to be on a dirt-cheap rent & long rent-free.
Overall then, I like the business with FUL, but am not convinced the shares have enough upside to tempt me back in.
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Hammerson (LON:HMSO)
Share price: 49.4p (down 12% today, at 14:30)
No. shares: 766.3m
Market cap: £378.6m
Proposed Rights Issue & Disposal
I mentioned this company on Monday, when it put out a statement saying that it was in advanced stages of a property disposal, was considering a rights issue, and approved for a £300m CCFF loan. Plus rent collection was improving, but still very poor.
Today's update confirms £274m is being raised from disposing of most of its c.50% VIA Outlets stake (at an 18.7% discount to book value) - not completing until Q4 2020, due to regulatory approvals required abroad.
Plus a bombshell announcement of a huge £552m Rights Issue - almost 1.5 times the current market cap.
That's a total cash raise of £825m.
Key points summary;
2 largest shareholders (34% combined) are supportive, taking up their full rights
More property disposals planned when markets stabilise
More flexible lease structure for tenants planned - sounds interesting
All proceeds will reduce net debt, to £2.2bn pro forma 30 June 2020
Share consolidation - 1 for 5 - so 766.3m existing shares would become 153.3m new shares, with the share price theoretically rising from 49.4p to 247p per consolidated share, and the market cap therefore unchanged
Rights Issue - a staggering 24 new consolidated shares for each existing 1 consolidated share!
Issue price - is 15p for new consolidated shares, or 3p in old money. That's a discount of nearly 95% to last night's closing price. Therefore this deal values the existing share capital at just £23m. Why hasn't the share price today collapsed completely then? The idea is that the Rights shares should be worth more than 15p - the theoretical ex-rights price is said to be 25.59p - i.e. shareholders get almost wiped out on their existing shares, but can take up or sell their Rights entitlement at a profit. In theory. It's a strategy to force everyone to take up their Rights. But over time, the 25.6p new share price could continue drifting down, nobody knows. The bottom line for me, is that this deal values existing equity at practically nothing, which is not good.
Half Year Report - no cash divis, but intends to pay divis in scrip form (new shares, not cash), in order to maintain REIT status - an interesting point, which has read-across for other REITs.
New leases - I'd like to hear more detail on this, but sounds like HMSO might be moving towards turnover rent style deals? It's good to hear that HMSO recognises the new reality, that major structural changes are needed in retailing property sector;
"The pandemic has exacerbated structural shifts in retail, exerting further pressure on both property owners and brands, and provided further evidence that the UK's historic leasing model has served its time. It is outdated, inflexible and needs to change.
We are introducing a new UK leasing approach - one that is simpler, reflects an omnichannel retail environment and rewards positive performance on both sides. It will deliver a sustainable, growing income stream and we are in initial discussions with retailers and anticipate introducing the first of the new leases later this year."
That's great, and very much needed, but there's no escaping that this is likely to hit capital values hard, hence potentially major writedowns are likely for HMSO (and all others in the sector) balance sheet property values.
The current operating stats are actually better than I expected;
Half year operational overview
Occupancy: Continued high level of Group occupancy at 94% (FY 2019: 97%); UK flagships 93%; French flagships 94%; Ireland flagships 96%; Premium outlets 93%
Rent collection: As at 31 July 2020, 72% of H1 2020 rent had been collected for the Group, with 34% of Q3 rent due collected. Average rental waiver of 1.1 months and deferral of 0.8 months during Covid-19 closures
Tenant restructuring: During the six months to the 30 June 2020, 36 of the Group's tenants have entered administration or undertaken a CVA affecting 88 units (out of 2,886 units across the Group) of which 49 continue to trade
... in recent weeks we have seen an encouraging increase in footfall as confidence begins to return amongst visitors to our flagship destinations.
My opinion - I've gone as far as I can with this. The problem is that, without a crystal ball to see into the future, it's impossible to know how much Hammerson's properties might be worth, once the dust has settled, and new lease arrangements are brought in. That will takes years, because HMSO is obviously going to continue collecting in the rent from solvent tenants, then only negotiate a new lease when the old one expires. Hence the reported figures are always likely to lag behind reality, and over-state property values on the balance sheet.
Clearly today's big fundraising will shore up the balance sheet. The major shareholders are standing their corner, but private investors don't have to. Even if covid is cured, there's still the ongoing problem of retail sales moving online. The only solution to that is for rents for physical retail space to be much, much cheaper, so that tenants can make a profit on reduced sales. Hence capital values are likely to keep falling, putting ongoing strain on HMSO's balance sheet.
It's the most shorted share on the market, with around 14% short interest. Earlier this year there was a fantastic trade on the big short squeeze. Maybe that might happen again? A covid cure could send the share a lot higher, potentially?
On balance, I can't conclude anything other than: impossible to value, hence I'm neutral.
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D4t4 Solutions (LON:D4T4)
Share price: 232p (up c.3% today, at 15:37)
No. shares: 40.2m
Market cap: £93.3m
I keep an eye on this share, because it's in my "looks interesting, but I don't really understand what it does" tray!
D4t4 Solutions Plc (AIM: D4T4, "the Group", "D4t4"), the AIM-listed data solutions provider, provides the following update ahead of its Annual General Meeting at 9.30am today.
It sounds in line, so nothing price sensitive today;
The Group continues to trade in line with the Board's expectations, with strong levels of both existing and new client activity.
D4t4 continues to make good progress towards transitioning to a recurring revenue model, with a focus on securing new contracts and transitioning existing customers from perpetual to term licences.
Not bad, considering the macro backdrop.
I seem to recall a subscriber here made a good point last time we looked at this share, pointing out that the transition to SaaS is understating the underlying profitability. Meaning that the shares might be too cheap maybe?
My opinion - sounds reassuring. I'll keep it on my watchlist. What do subscribers think? Informed views welcomed, as always.
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Dp Poland (LON:DPP)
Share price: 7.25p (suspended this morning)
No. shares: 254.0m
Market cap: £18.4m
Possible Transaction & Suspension
Subject to regulatory approval, they're looking at using DPP's listing to do a reverse takeover of another Polish pizza company, called Dominium S.A.. Its largest shareholder is Accession Mezzanine Capital III L.P.. Googling that, shows it's a Jersey based partnership, sounds like private equity maybe?
The Directors believe the potential Acquisition will create a superior restaurant group with greater scale and to utilise the anticipated synergies which are expected to be presented upon a combination of both businesses under the Domino's brand.
Well, it can't be much worse than DPP! I've spent years pointing out what a rubbish business DPP is - constantly loss-making, losses don't reduce as it expands, i.e. rolling out an unsuccessful format. Constant fundraisings. Constant failure to meet J-shaped forecasts. It's a terrible, badly-run business, which is not viable in its current form. But every few years, a fresh bunch of optimists come forward and put more money in.
I'll be interested to read the admission document for the enlarged business. I'd say the main risk is that Accession might be seeking to find an exit route, using DPP's listing?
Pizza is ubiquitous in Poland. I've been there often, and people tell me that Dominoes pizza is good, but too expensive. If this deal goes through, maybe the new owners can lick it into shape?
Let's wait to see what the deal looks like.
Warehouse Reit (LON:WHR)
Just a quick comment, as I've run out of time.
I've mentioned this smallish REIT before, which specialises in buying & renting out warehouses. It's a much safer proposition than trying to work out if a retailing REIT is a bargain, or bust.
Good divis are available from WHR;
Warehouse REIT, the AIM-listed company that invests in and manages e-commerce urban and last-mile industrial warehouse assets in strategic locations in the UK, today provides a business update including Q3 rent collection and progress on its investment pipeline following its successful £153 million equity raise in July. The Company also reaffirms its first quarter dividend payment of 1.55 pence, payable on 2 October 2020, reflecting an attractive annual equivalent dividend payment of 6.2 pence per share.
Rent collection - pretty good, but not quite as strong as I was expecting. This is like chalk & cheese compared with struggling retailing site owners though;
As at 30 July 2020, 94% of contracted rent due on the June 2020 quarter date had been received or is being collected monthly, with ongoing discussions continuing for the balance. The Company is taking a proactive approach towards collecting rent and has agreed to monthly in advance payments amounting to 27% of the contracted rent, of which, 60% has already been received.
Various other details are given.
I don't hold myself, but this share is on my list of good stuff. Hence worth flagging up to readers here, as something you might want to look at, doing your own research. I haven't looked at any other REITs, so cannot compare it with peers.
Time for a lie-down in the sun, methinks!
Best wishes, Paul.
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