Good evening!
It's Graham here, on the night shift.
Paul and I had a rather fun evening last night, with Ed and many of our investing friends. I must echo Ed's congratulations to David Stredder for another terrific event, filled with interesting talks and wonderful opportunities to network or simply have fun!
Thank you for all your support - many readers came up to say how much they appreciate our work. It really means a lot to us!
Last night's fun and games wound up for me in the Victoria Casino on Edgeware Road, which is owned by Rank (LON:RNK). I've been a member there since my last trip to London. Happily, I again managed not to lose any money in the poker room, despite several hours of play! The way I do it is by using an extremely boring strategy - perhaps there is a lesson in that for the stock market, too!
Anyway, the Victoria is a fantastic property and I must congratulate the staff on their professionalism in removing an older gentleman who tried to fight another player at my table, after some sharp words had been exchanged. Neither player was known to me, I might add!
In the end, I needed to buy breakfast before heading back to my hotel. That probably tells you enough about what a long day it turned out to be.
As a result, I can't promise that this particular report will meet our usual standards. It certainly won't meet normal rules of punctuality. But let's crack on and see what happened on the RNS feed on Thursday.
Provisional list:
- Card Factory (LON:CARD)
- Portmeirion (LON:PMP)
- Norcros (LON:NXR)
- Northamber (LON:NAR)
Creightons (LON:CRL)
(Please note that I have a long position in CRL.)
Before I go to the news, I'd like to mention that Creightons (LON:CRL) seemed to make a big impression at Mello, and the share price has improved from 41p a week ago to 46p today (it closed yesterday at 48p).
It provided stiff competition for me, as I was presenting on IFRS 16 at the exact same time as Creightons was presenting (but huge thanks to those who came to mine anyway!)
As a shareholder in Creightons, I would obviously have gone to their talk, if I had been free. That's the biggest difficulty with Mello: there are so many interesting talks happening simultaneously, planning your day is a real challenge!
Another company which seemed to capture the imagination of attendees was MTI Wireless Edge (LON:MWE). People also seem very interested in Volex (LON:VLX), after it was discussed at the MelloBASH event.
Card Factory (LON:CARD)
- Share price: 158.5p (+2%)
- No. of shares: 341.5 million
- Market cap: £541 million
This statement says that full-year profits will be broadly in line with expectations.
"Broadly" usually says "slight miss" to me, but the market seemed to like this update.
According to the forecasts visible to me, CARD was looking to do revenue growth of 4.3% in the current year.
This update says year-to-date revenue growth is moving faster than that, at 5.0%.
New stores: worth noting that the revenue growth is coming mostly from new stores and the company's website, rather than growth in existing stores. Like-for-like store sales are growing at just 0.7%, year to date, and declined 0.4% in Q3. Store sales were impacted by weaker footfall - a problem facing most physical retailers.
On the other hand, website sales are up 22% year-to-date, and the company is on track to increase its number of stores by 50 this year.
External cost pressures: National Live Wage gets a mention, as does storage costs - Card Factory is vertically integrated, so I guess this creates storage problems it might not face, if it was buying in the product from 3rd parties?
Partnerships: CARD is on track to supply half of Aldi's UK estate by the end of this month, and there is a big partnership in Australia starting in January (these initiatives had already been announced).
Net debt: £171 million, excluding lease liabilities (this is a simple and effective way to report net debt under the new standard). This number is almost unchanged, compared to three months ago.
CEO comment:
"I am pleased with our year-to-date performance. Our ongoing focus on customer experience, and the quality and range of our card and complementary non-card products, has led to an increased average spend both in stores and online. This has helped us to substantially offset the effect of the lower high street footfall experienced in the quarter and the corresponding impact on our like-for-like sales.
My view
This is one that I've changed my mind on over the years.
Initially, I was very sceptical, and briefly had a short position in it - this is back c. 2015, when the share price was c. 350p. It turns out that my initial view on its valuation was probably right, but I was too early!
I later came to appreciate the company's business model. Being vertically integrated, it has a lot of control over its own destiny and has earned fine operating margins of 18 - 22%. So I found myself tempted by the shares once or twice, after the valuation became more reasonable.
At this stage, I'm a bit concerned that rolling out dozens of new retail stores while like-for-like sales are negative could be a risky strategy. The debt load obviously adds to the risk, too.
One way of looking at it is that CARD's operating profit peaked back in FY january 2016, despite revenues having increased greatly since that year. The company has been running to stand still, since then.
Gross margins have declined and if weak footfall creates persistently declining like-for-likes, then the company will be relying on web sales and the retail partnerships to pick up the slack.
Overall, therefore, I'm neutral on this one. It has a mix of attractive and less attractive features, so I'm happiest on the sidelines.
Portmeirion (LON:PMP)
- Share price: 695p (-18%)
- No. of shares: 10.9 million
- Market cap: £76 million
This homeware company had a nasty profit warning back in May. when it announced that Korean sales were lower than expected.
Today, it announced that problems in Korea are ongoing:
Sales into the South Korean market, specifically for the Portmeirion Botanic Garden ranges, continue to be weaker than expected. It is clear that the significant historic demand in South Korea for our classic Botanic Garden ranges has led to other geographical markets re-shipping into South Korea, resulting in overstocking in this market.
This is an unusual problem. PMP must have little control over its distrubutors, who are presumably supposed to be forbidden from doing this?
And I'm guessing that revenues in recent periods (before the profit warning) were exaggerated by distributors who planned to re-ship, rather than sell the products in their home market.
The solutions which have been attempted so far are:
- developing new SKUs for South Korea - "these ranges have started to sell positively".
- more due diligence on distributors, to reduce the risk of re-shipping
- a new contract with a major South Korean retailer
- developing other export markets outside South Korea
Despite these initiatives, profit for 2019 will be materially behind expectations, due to a larger than anticipated decline in sales of the Botanic Garden range, and the costs of developing and manufacturing new products.
Comment by the new CEO:
The Group has a long and consistent track record of growth, leveraging our heritage portfolio of homeware brands around the world. We believe that the recent actions we have taken will be successful in protecting our brands and export markets in the long term.
My view
This company has been around for a long time, and has been listed since c. 1994. If you've been watching it for a while, and looking for a buying opportunity, then this could be what you've been waiting for. There's nearly a 50% discount compared to the share price high last year.
Unfortunately, the RNS doesn't quantify the reduced profit expectations for the current year. We should expect some ugly results for a year or two. But for an old, established business like this one, now could be a good time to bet that it will stick around for a lot longer!
I've just been browsing its brands, and I like them. This share is interesting at current prices, in my view.
Let's see how the StockRank shifts in response to the latest developments. It strikes me as potentially fitting into the Contrarian bucket: high quality, high value and low momentum.
Norcros (LON:NXR)
- Share price: 237p (+1%)
- No. of shares: 80.5 million
- Market cap: £191 million
Norcros, a market leading supplier of high quality and innovative bathroom and kitchen products, today announces its results for the six months ended 30 September 2019.
This one always looks cheap, for reasons we've discussed in the archives. It has operations both in the UK and in South Africa.
Norcros has presented the pre-IFRS 16 numbers, along with those reported under the new rule. The difference in underlying operating profit created by the new rule isn't too big: just £300k.
As I've noted before with this company, the like-for-like revenue growth is modest. Today's reported LFL revenue growth is 0.9%.
Net debt has reduced to £41 million - good.
Outlook
The fragmented nature of our markets continues to provide growth opportunities for the Group as we continue to focus on winning market share. The Board remains confident that the Group's leading market positions, portfolio of strong brands and financial strength will enable further progress in line with its expectations for the year to 31 March 2020.
My view
I haven't got much to add to my previous comments on this company, except to say that the progress in underlying operating profit (from £15.2 million to £17.4 million) and in debt reduction would tend to back up my (weakly-held) suspicion that this one has been undervalued. Good luck to all holders.
The StockRanks give it a resounding thumbs up, with 98/100.
Northamber (LON:NAR)
- Share price: 45.5p (+1%)
- No. of shares: 27 million
- Market cap: £12 million
I'm very sorry to hear that the Chairman (and majority shareholder) of Northamber, who I met at a couple of AGMs several years ago, has taken ill. The commentary for these results has been written by the Acting Chairman.
These results confirm nine consecutive years of losses for the company, which has been sitting on huge wealth relative to its market cap for a long time.
Net assets are reported as £16.6 million, but this is before the sale of a warehouse for £10 million more than its book value.
There has been no reason to buy shares in this, except for the potential that the net asset value, or a large portion of it, might be returned to shareholders.
The acting Chairman says today:
It is too early to report on how best to apply the proceeds of the sale of the warehouse property; there are a number of options open to the board on how best to utilise these funds for the benefit of the company and the shareholders. We also need to decide on an appropriate course of action in relation to our overall property requirements. We shall of course be reporting the outcome of any decision made in due course.
An interesting reference to "overall property requirements" - there should also be significant value in the office property owned by Northamber in Chessington.
The timeframe for the return of all this value to shareholders remains highly uncertain. In making that decision, there is only one man who matters.
I'll call it a night - it's very late. Thank you for reading.
Best regards
Graham
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