Small Cap Value Report (Tue 16 March 2021) - SCS, EYE, LIT

16th Mar '21 by Paul Scott

84 comments 14578 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Agenda -

Paul -

Scs (LON:SCS) (I hold) - Interim results

Eagle Eye Solutions (LON:EYE) - Interim results

Jack -

Litigation Capital Management (LON:LIT) - litigation financing firm; revenue down due to Covid but but optimistic on future business

Mello Tuesday

Investing in Metals and Mining - a very topical subject, with this sector being buoyant at the moment. It's not something that I cover, but readers may be interested, I know a lot of you hold Sylvania Platinum (LON:SLP) for example. More information here, including a discount code for Stockopedia readers.

Paul’s Section

Scs (LON:SCS)

(I hold)

232p (pre market open) - mkt cap £88m

Interim Results

ScS, one of the UK's largest retailers of upholstered furniture and floorings, is pleased to announce its interim results for the 26 weeks ended 23 January 2021.

ScS has an unusual year end, close to the end of July each year.

It’s quite tricky to work out what has happened in each 6 month period, so I’ve gone back to the last year pre-covid (FY 7/2019), which looked like this:

H1 (26wks ended 26 Jan 2019) - Revenues £151.4m, Underlying EPS 2.2p

H2 (26 wks ended 27 Jul 2019) - Revenues £166.0m, Underlying EPS 28.1p

As you can see, in a normal year, ScS makes almost all its profit in H2. I think that’s because the busiest time for taking orders is Christmas & January sales, but due to the time lag between orders being placed, and actual deliveries weeks later (it’s delivering the finished goods to the customer that would trigger revenue being recognised), then the busy period feeds into revenues in H2.

Numbers for 2020 were normal in H1, ie. around breakeven, then H2 (26 wks ended 25 July 2020) bore the brunt of covid lockdown 1 (the most severe), generating only 2.9p u/l EPS, instead of the usual large H2 profit.

What seems to have happened is that, when the shops re-opened (in June 2020, I think), then there was a great deal of pent-up demand, which caused a surge in orders. The time lag then meant that a lot of this surge in orders were not delivered until H1 2021 (26 wks ended 23…

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Gromley

16th Mar '21

Nice breakdown abtan - I do something similar for stocks in which I have a perennial (not always financial) interest.

I am not at all up to date with SCS (LON:SCS) , but I'm puzzled by you 19/20 FY & H2 numbers for overheads. I'm guessing there must be something in the order of £10m covid relief in the 'other admin' line? Did they not itemise that?

Duplicate post -deleted.

(If I can think of an interesting anecdote whilst edit is still available I will add it!)

Harry Hindsight

Like life, business finds a way. Debenhams 'occupied' a large block of listed building in Canterbury - fancy owning a 'Dickensian' style house opposite the Cathedral - bit busy but won't need a kitchen ever - or own the coffee shop below and live above. Or Browns of Chester. Had some cracking buildings in their day before sale and leaseback.

abtan

Hi Gromley

Yes, there's a +£8,633k under admin costs (highlighted in red - that's my own annotation).

This was a balancing figure, but it didn't tally with the covid support number that they stated, I don't know why.

I checked all the other admin numbers and they were correct, so presumably something else is lumped in with this £8,633k, but that's a bit too much work for a company I don't hold and probably won't until the numbers are a little clearer.

Or I've made a mistake somewhere - happy to be corrected if anyone can spot it!

Cheers

As a newby coming up to my first First Day of Furlough (FDF) I have read vociferously and somewhat of an obsession - point - yes need to focus on the popular and quality few and not the reported many.

Aha - thanks abtan, but I think you put it in the wrong column then?

Your 8,633 is in H1 21 (and superficially seemed to be in the right place, as there must have been some support in that Half).

But the FY20 (& H2) look like there is a missing cost offset?

I thought the same thing - where's the covid relief in FY20 H2?

I imagine it's bundled in with the 1,527 "other costs", which is a balancing number.

I must have forgotten to split it out of the FY results, or maybe it wasn't clear in the results. I'm not too sure, but I didn't really feel like going back to check.

The important thing about this exercise was to see how variable/semi-variable and fixed the other operating costs actually were. I'll be honest, I didn't really learn much from the numbers and I think that I just need to wait for the dust to settle.

Dojosan

Rambler Metals And Mining (LON:RMM) - Sorry to hear that Silver Moon. Yes previous investors completely and utterly shafted.

Now under new management (I believe the CEO involved in the turnaround of Shanti Gold) + super high copper prices , hopefully will lead to better results in 2021.

Bobnoyce - may i suggest - if you are seeking for futher information on RMM, you can search vox markets videos and podcast - where Alan Green + John Meyer discuss RMM in detail.

In addition, on the LSE BB, the resident experts on this stock on the RMM BB are dryan777 + Cornishknocker . These two investors have an indepth understanding of this company. If you go back to sometime around 15th December 2020 onwards, you will get a good picture of what is going on. Also, ignore the rampers. GL.

I bought at on average 0.41p during post Christmas time prior to recent placing which provided useful financing for the company's oeprations.

Fair enough abtan - thanks for the explanation - just don't send me any businesses cases as I'd always kick them back if there was an unexplained anomalous number.

(otoh DO send me business cases with an obvious anomalous number as once you've answer the question on that issue, I'll probably assume everything else is okay!)

Nope, never ever used that tactic, definitely not, how very dare you for suggesting such a thing. I am however led to believe that sometimes this happens, but you just have to know your target audience. Or so I'm told.

Rbg Holdings (LON:RBGP) w.r.t litigation financing under Lionfish adopt same policy as Litigation Capital Management (LON:LIT) of recognising gains only when realized . So I suspect it is the company's internal decision which policy to adopt rather than specified by any FRS.

What I really wanted to say was - car crash of a result today - what on earth is the SP doing at this level. Sorry to be frank!

Last time in Sept 20, when they disappointed - the share price was down 15% circa (Premier Miton selling off just before and during the TU did not help!) ,

Boon

Too lumpy profits, majority dependent on land sales.

Agree its a good defensive NAV play if you get it at a discount or confident of increasing NAV yearly.

Ten70

Amazing analysis, tks!

Paul Scott

Thanks abtan, good points on Scs (LON:SCS)

Although surplus cash is far higher than you indicate, because they don't have to pay off all creditors before they fall due, as your figures imply. The business model is such that ScS has negative working capital, therefore it should always have a lot of cash, on a rolling basis.

DFS shows how that cash can be removed, yet the business can still operate completely normally. That's why ScS would be so attractive to private equity. In practice, they could remove all the cash, put in a bit of gearing, and they've got the business for free.

See slide 10 - I think this is best way of looking at cash:

Phuntt

Mojo, I don’t have your ability to totally dismiss stocks I don’t understand fully (probably because if I did I wouldn’t have any left to invest in) but I have to say I totally agree here - I looked at and really wanted to invest in Bango (LON:BGO) a few weeks ago but after a very frustrating morning found myself unable to understand how they actually make money, therefore had to refuse the incredible opportunity they were offering me. Unlike you I’m fairly certain I’m going to regret my decision but hey ho...

transport_tycoon

Phenomenal write up on SCS!

I wouldn’t worry about a drop from 4.6 to 4.5 on a review site - if that were the figure, it seems like noise, within normal fluctuations.

mojomogoz

17th Mar '21

A couple of people have corrected me technically on Twitter this morning re Bango (LON:BGO) - I'm not account expert. Nevertheless, it still leaves open questions re how they are accounting for things. And, yes, they seem to want to make their accounts difficult

rmillaree

SCS (LON:SCS)
Abtan
"The company definitely does not have £97.8m of its own cash (sadly)."
Ignoring theis typo (actual figure being £91.8 mill not 97.8 per pauls original article ) I am with Paul here from a "technical description" despite your point being 100% valid and well presented - i would say the company most definately does have £91.8 mill of its own cash - to pretend the cash doesnt exist due to the fact there are payables is somewhat confusing the issue potentially for those less savy than yourself.
Note i agree with your comments ref what they owe out being important and these obligations should always be noted when mentioning cash to give the full picture. Particularly ref supplier credit - that may not be to easily available in future f the cash departs the buisness and also savy customers may be less likely to hand them cash as deposits.
Pauls main thrust to me though is 100% correct that this cash is unencumbered and could be used on what they see fit although there will be knock on considerations if it were ever to completely vanish.

Thinking about this form the flipside - we are always looking at "net cash" or "net debt" here really - sum of - if a company has £100 mill of net debt and oves suppliers £100 mill i am presuming you would not say net debt is £200 mill - if a company had nil net cash and owed suppliers £200 mill presumably you would not say it had £200 mill of debt - therefore if a company has £100 mill of cash and owes suppliers £300 mill we wouldnt say it was £200 million debt - the cash is there - exists and gives the company a measurable safety net of some sort (just not the solvency kind if thats all thats on the balance sheet)
I think we would all agree though the payables line on the balance sheet can be the silent killer with regard to business solvency genrally speaking - thankfully for scs holders thats not an issue "for now"

ISAallowance

"if a company had nil net cash and owed suppliers £200 mill presumably you would not say it had £200 mill of debt"

Assuming that was the complete financial situation of the company, I certainly would say it had £200 mil of debt.

"therefore if a company has £100 mill of cash and owes suppliers £300 mill we wouldnt say it was £200 million debt"

Once again, I would personally say that company had £200 mil of net debt! Maybe I'm out of touch with modern financial lingo, but I see owing things as debt, whether it's to the bank or to suppliers.

More generally, companies that can manage negative working capital like this are great whilst they are expanding, but it's got to unwind in a contraction, you can't postpone paying suppliers for ever. Given that selling large ticket items direct to consumers has got to be pretty cyclical, then I wouldn't want to bet on no contraction.

unbelievablejeff

20th Apr '21

Scs (LON:SCS) (no position)

Very new here and just getting started in direct investing. May someone please help me understand why the gross gearing of over 300% doesn’t appear to be mentioned as a bad thing? Thanks

Small Cap Value Report (Tue 16 March 2021) - SCS, EYE, LIT

Mello Tuesday

Paul’s Section

Scs (LON:SCS)

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Paul Scott

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