Small Cap Value Report (Tue 28 July 2020) - FOXT, GRG, SAA, CARD, IGR

Good morning, it's Paul here with the SCVR for Tuesday. Please feel free to add your comments from the 7am RNS, as I gradually write up the main article throughout the morning. I read all your comments, and am finding them very interesting & courteous of late, which is a pleasure to behold!

Estimated timing - I'm aiming to be finished by the official finish time of 1pm today.
Update at 13:09 - today's report is now finished. Sorry I didn't have time to cover everything.

Quartix Holdings (LON:QTX) - have just emailed me their results presentations, so I'm passing on the links for your interest. I'll write up a section on their figures later today;

Quartix - Interims business presentation video

Quartix - Interim financial presentation video from CFO/COO

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Interim results - I'm excited to see that the first interim results for 30 June are starting to trickle through - so I'll focus on that first. Trading updates are all very well, but they often tend to cherry-pick key numbers, and omit the full detail (especially if PRs have been let loose on the announcements!). However, nothing can be hidden in interim results. So I'll get cracking on a couple of those first.

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Foxtons (LON:FOXT)

Share price: 38.5p (up 3% today, at 08:33)
No. shares: 330.1m
Market cap: £127.1m

(I'm long)

Half Year Report

Foxtons Group plc, London's leading estate agent, today announces its financial results for the half year ended 30 June 2020.

This half year, as for most companies, is split between a normal Q1, and an abnormal Q2 which was dominated by the unique covid-lockdown. All Foxtons branches were closed between 23 March - 30 May. The company updated the market frequently during the crisis, here is our archive, where I wrote about Foxtons 5 times between April & July, including its 40p fundraising in April, which raised £22m in fresh equity.

Interim results - the commentary is well worth reading for general interest, even if you're not interested in buying Foxtons shares.

Revenues down 22% on last year, at £40.4m

Statutory loss before tax of £(4.3m) - somewhat worse than the loss of £(2.5m) LY H1 - I was pleasantly surprised by this, but remember that it has benefited from the furlough scheme, waiving of business rates, and some grants. Still the Govt schemes have done what they were designed to do - retaining employees, and greatly cushioning trading losses.

Net cash of a very healthy £40.5m - boosted by £4.3m rent deferrals, and £3.5m in deferred VAT. So that's £32.7m of normalised net cash. Top marks to Foxtons for clearly stating these figures in the highlights section. This should set the standard for all companies reporting - they must give prominence to the artificial boost to cash from stretching creditors. Otherwise, they're not being honest, and investors do notice these things.

Acquisitions - strategy is to acquire high quality lettings books. London Stone Properties Ltd was acquired in Feb 2020. I've checked its accounts at Companies House, and it looks a decent business.

Recent trading - the most important bit, to answer the question whether things are returning to normal? The answer seems to be that things are improving gradually, e.g.

Lettings - commissions down 12% in June, down 3% in July - almost back to last year's level

Sales - down 44% in June, down 32% in July, and current pipeline now "broadly in line" with LY - it takes time to rebuild a sales pipeline for an estate agent (viewing to completion typically taking several months), so I think this looks OK.

Outlook - vague - well placed, but cautious. The 6 month Stamp Duty Holiday should be providing a good boost.

Balance Sheet - looks OK to me, although remember the stretched creditors will have to be paid. This begs the question, should cash-rich companies be taking advantage of various schemes to defer payments, and informal arrangements with creditors? In my view there is no point, because they can't earn any interest on cash balances. So why withhold payments? It looks a bit grubby I think, to stretch your creditors when you don't need to. Hence I'd like to see FOXT help the Govt & the taxpayer, by paying up the deferred VAT, which could also be trumpeted as a positive & patriotic thing to do. After all, estate agents can use all the positive PR they can get, for some reason the public seem to hold them in low esteem (I've never quite understood why, as most seem fine to me).

NAV is £131.9m, less intangibles of £112.2m, gives NTAV of £19.7m - quite good, and it includes a decent cash pile of £32.7m normalised net cash, as mentioned above. I'm not sure if that includes client cash (rent deposits, etc), do any readers know? When I rented a flat in Mayfair in the mid noughties, my landlord always complained that Foxtons sat on my cash for several months before paying him. I showed him my bank statements, to prove that I was paying the rent! That was a long time ago though, so hopefully they've improved since then.

Lease liabilities are quite large on FOXT's balance sheet. That could present a problem if more business migrates online, as in surplus costs. There again, you still see plenty of people looking in estate agents windows, and footfall outside zone 1 seems to be growing all the time, from what I can see, subjectively.

I note a new £5m loan has appeared on the balance sheet, which note 9 explains was drawing down of the bank RCF. This was fully repaid on 8 July, and would of course be taken into account in the net cash figures mentioned above, so is not an issue. In fact, that is has been fully repaid, post period end, is reassuring that the cash position is healthy, and no debt is required.

My opinion - I see this as a reassuring update. Foxtons is securely financed, with no interest-bearing debt after repaying the RCF recently. Therefore, I see no insolvency risk here at all.

H2 is likely to be loss-making, I imagine, as the benefit of the furlough scheme winds down, and the sales pipeline is bound to take time to rebuild. Offsetting that, the Stamp Duty Holiday should be a nice boost to accelerate sales transactions. Press reports suggest some people want to leave London and work from home in the countryside. Set against that, there will always be people wanting to come into London as things (slowly) return to something like normal. Other press reports have suggested that the Stamp Duty Holiday has triggered a dramatic rise in enquiries from buy to let investors.

Overall, I'm happy with this update, and it looks to me as if FOXT is now on a recovery path. Its overheads are quite flexible, since I understand staff are partly paid on commission, so reduced sales means reduced staff costs.

I could see this share being usefully higher, taking a say 2-year view. I've no idea what the share price will do in the shorter term. Buying close to an all-time low, and below the recent placing price, seems quite decent to me.

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Greggs (LON:GRG)

Share price: 1413p (down 3% today, at 10:16)
No. shares: 101.3m
Market cap: £1,431.4m

Interim Results

Please forgive me for stepping outside of the small caps space briefly, but it's interesting & topical. Results from Greggs should have read-across to other companies, and inform us of the wider economic picture with town centres. Here are my notes of the key points only;

Heavy, but not ruinous loss in H1, at £(65.2m)

Since re-opening, most recent week was 72% of 2019 revenues, so LFL of minus 28% - I think that's OK, given that town centre re-openings are still in their early days.

Limited product range - best sellers only - this makes complete sense, as it allows them to operate on leaner staffing levels & reduces central costs.

Click/collect and delivery expected to be rolled (geddit!) out nationally. This is key I think - we're seeing in UK & America, that food businesses which adapt & expand into these areas, are the ones that are surviving. E.g. burrito company Chipotle has seen its shares boom, whilst sadly my favourite UK burrito chain (far better product than Chipotle incidentally), called Chilango, has recently gone into administration. It didn't adapt fast enough, sadly.

This year Greggs is opening 60 new, and closing 50 shops. It should emerge a long-term winner, and over time should be able to reduce its rent costs as leases expire.

Business rates relief for 1 year to March 2021, will save £25m - but of course is then a headwind for FY 12/2021 onwards. Although there might be more relief for smaller shops, and many Greggs are small, so it might fare better than most, at a guess?

Rents - paying monthly in advance, perfectly reasonable in the circumstances. I doubt many landlords would quibble over this.

Inflation - food/packaging/energy expected to cost +4%. On top of large increase in minimum wage this year, that's a nasty headwind.

Furlough - 75% of staff have been recalled, which is good news.

Profit guidance - current trading is cashflow breakeven (i.e. loss-making, once we take into account depreciation of fixed assets, and stretching of creditors). Breakeven profitability is 80% of 2019 revenues - recent trading not far off, although they only give us a single week.

Balance sheet - not great. The update here on 9 April shows that it borrowed £150m under the Govt CCFF scheme. But this was only for 11 months. Today's update has a going concern note which indicates it thinks the CCFF scheme is likely to be extended, but GRG is putting in place alternative arrangements to refinance this debt in March 2021. Given the company's excellent history of profitability & growth, then I imagine it should be OK, but there is an element of risk. If we see a second wave in the autumn, and widespread shutdowns again, then Greggs could be vulnerable. Not out of the woods yet.

My opinion - this is a terrific business, and it should survive, and recover, although there is an element of risk, given its borrowings, if a serious second wave of covid were to force long shutdowns. Although in that scenario, Govt support would likely continue, so it would probably be alright.

Overall, it looks like recovery to previous levels of profitability might take some time. The share price has scrubbed off the big bounce, and is almost back down to its March lows. Yet it still doesn't look good value to me, on a risk:reward basis. Nobody knows how much (nor how long) town centres are going to recover. Has some footfall been lost forever? We just don't know, hence why pay 22 times forecast 2021 earnings? In my view, it's still too expensive.

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M&c Saatchi (LON:SAA)

Share price: 52.8p (up 14% today, at 11:32)
No. shares: 115.4m
Market cap: £60.9m

Trading, Banking, Strategy Update

Advertising/PR company with a famous name.

I've just re-read the update from 30 June, which was reassuring. Today's update goes further, and says;

Further to the announcement on 30 June 2020, the Company expects to report a small underlying profit before tax (PBT), before exceptional costs, for the 6 months ended 30 June 2020.

That strikes me as a pretty good outcome in the circumstances. During the covid crisis, we've heard from so many companies that they were pulling all non-essential spending, which would presumably include PR. Yet Saatchi seems to have survived intact, helped by cost-cutting.

Surprisingly, Q2 was resilient (but down on last year), better than expected, and client wins are mentioned.

Liquidity - this sounds fine;

The Group's balance sheet remains strong, and has improved further since the announcement on 30 June 2020, with total cash at £59m as of 23 July 2020, compared to £52m as of 23 June 2020. The Group has a committed £36m revolving credit facility (RCF) and a £5m overdraft facility with NatWest. The RCF is fully drawn and the overdraft remains undrawn, leaving net cash of £23m, compared to £16m on 23 June 2020.

There's also a £7m CLBILS facility (undrawn). Given the uncertainty, I don't blame the FD for drawing down a load of cash, just to be on the safe side. But it does look like belt & braces now!

The one glaring omission from this announcement, is disclosure of stretched creditors. As mentioned above, it is misleading to report a buoyant cash position, without disclosing clearly at the same time how much short term gains in the cash position is due to not paying VAT, payroll taxes, or rents on time. Still, it is a PR company, so I would expect them to gloss over potential negatives. That's always a mistake, investors need to be shown the full picture, not selected highlights.

Banking covenants - there are no immediate issues;

We are confident the company can comfortably satisfy its existing covenants for the next quarterly testing period, which falls on 30 September 2020, without needing any alteration....

Dec 2020 & Mar 2021 covenants are relaxed, and a table is given for that, which is helpful. This sounds like sensible contingency planning.

Of more importance is that bank facilities expire on 30 June 2021, so the group will need to renew bank facilities before then.

My opinion - this is clearly a good update, in bad circumstances. Conventional wisdom is that PR/marketing type companies do disastrously badly in economic downturns, but I looked back to 2008, and Saatchi seemed to sail through the problems largely unaffected.

There's a risk that SAA may have to do an equity raise, in order to keep the bank onside for next year's renewal.

Other than that, I'm impressed with how well the company has done during this major crisis. Overall then, it looks potentially interesting, I'll add to my watchlist. Note from the 3-year chart below, that something was going wrong well before covid hit, so that would need to be investigated properly before buying shares in this. As always, my stuff here is a brief review, not a complete investigation, which readers need to do themselves.

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Card Factory (LON:CARD)

Share price: 44.7p (up 7% today, at 12:15)
No. shares: 341.6m
Market cap: £152.7m

Trading Statement & Capital Markets Day

Card Factory, the UK's leading specialist retailer of greeting cards, dressings and gifts, is pleased to update the market on its trading performance and financial position.

Sounds like there's a placing in the pipeline, why else would it be doing a CMD? It certainly needs one. This retailer of cards & gifts went into the crisis with too much debt, and paying overly generous divis. That was tolerable in pre-covid times, but has left it looking precarious in the current climate. Hence why I've changed my view on it - as we have to do when the facts change. Shares are not like supporting a football team through thick & thin. If risk:reward deteriorates badly, then they need to be unceremoniously dumped. Easier said than done though! I ditched mine a while back, and am not interested in buying back in unless/until the debt has been reduced through an equity raise.

On the upside, pre-covid this business was remarkably cash generative, and had the highest operating margin I can remember for a High Street retailer. Hence if footfall recovers close to pre-covid levels, then there's still a very good business here, once the debt is reduced.

Today's update - almost all stores (1,015) now trading again, done on a phased basis in June & July.

Sales - this sounds really good, and is better than Greggs;

Sales realised from our stores have exceeded our initial expectations, with like-for-like sales since reopening down 21.6% (compared to an anticipated 50% reduction in the first month of reopening).

Although the number of in-store transactions has fallen, reflecting footfall levels, the average spend has increased by 24.9%...

How interesting. The obvious questions are;

• What has driven such a large increase in average spend, and
• Is the higher average spend sustainable? If it is, then CARD could do well, even on reduced footfall. So this is highly significant. Or, have customers been catching up with their greetings card requirements, and average spend could then fall back to more normal levels? That would clearly be negative for future LFL sales & make it very difficult to turn a profit
• Was the higher average spend driven by discounting?

Website sales are still up strongly, even after stores re-opened, although slowing to +60.5% growth. I seem to recall that online sales are only a small proportion of the total, and my general impression is that CARD has missed out on a potentially huge opportunity to automate greetings cards. New website launched in early July.

Revenue for H1 is disclosed, but what about profit/(loss)? Nothing said about that, so likely to look grim;

Aggregate revenue for H1 FY21 (i.e. 1 February to 31 July 2020) is expected to be approximately £100m (H1 FY20: £195.6m), with material impact from the 12 week period of store closures.

Cash management - I'll copy this in full, as it's all useful, and (please take note people at Saatchi!) they've disclosed the stretched creditors - why didn't you?!

The Company has continued to manage costs, cash and creditors carefully and expects to remain within its revised banking covenants. Net Debt as at 19 July 2020 was £144.2m, which is below our original forecast, attributable to:

· increased revenues from store and online sales exceeding expectations;
· measures to reduce costs;
· improved terms agreed with suppliers and managing stock intake;
· cost deferrals amounting to c. £24.7m, including rents, VAT and some agreed delayed payments to suppliers. Deferred rents are generally payable over 12 months from September 2020.

To date, the group has received funding of £15.5m under the Coronavirus Job Retention Scheme, which has allowed us to protect roles during recent months. As previously announced, the group is eligible to issue commercial paper under the Covid Corporate Financing Facility, should it be required.

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Outlook - too early to tell if pent-up demand is boosting sales or not.

Virtual CMD - signup link is here.

My opinion - there's a good business here, but it clearly needs to refinance the debt. To get investors excited enough to put in fresh equity, I think it will need to have a much more convincing online strategy. On my watchlist, but I wouldn't buy until it's refinanced properly.

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Ig Design (LON:IGR)

Unfortunately, I've run out of time to do a proper write-up about its FY 03/2020 results out today.

So this is just to flag that the Q1 trading update within its report today reads quite well, so it might possibly be worth readers taking a closer look at this company?

The balance sheet is looking a lot better, after some fundraisings & acquisitions.

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Unfortunately, I've run out of time today, so will have to leave Quartix until another time.

See you tomorrow!

Best wishes, Paul.