Small Cap Value Report (Wed 30 June 2021) - PDG, WYN, CAR, STU, SAGA, CBOX, SAA
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Good morning, it's Paul & Jack here with Wednesday's SCVR.
Agenda -
Paul's section:
Studio Retail (LON:STU) (I hold) - impressive results for FY 03/2021, and encouraging outlook comments. Seems strikingly cheap on a PER of only 6.6 - scope for a re-rating? I think so
Saga (LON:SAGA) (I hold) - tender offer for old bonds is over-subscribed, and scaled back to the £100m maximum. Finances now look much more secure.
Cake Box Holdings (LON:CBOX) - strong results, despite the pandemic. Looks a smashing business, and the big rise in share price seems fully justified.
M&c Saatchi (LON:SAA) - late 2020 accounts finally published. Strong H1 2021 trading is more important. Good news re reduced potential dilution. Could be worth a fresh look, by readers, but it's not for me.
Jack's section:
Pendragon (LON:PDG) - Pendragon confirms its peers' comments. Trading is strong for car retailers right now. These shares are often cheap due to their low margins but it's possible that the industry-wide rerating has further to run. Potential H2 supply disruption is flagged as a possible concern, however.
Wynnstay (LON:WYN) - record underlying profit before tax for this prudently managed supplier to the UK agricultural industry. Low margins and slow growth in the past might put some off, and the shares are not the bargain they were six or so months ago, but Wynnstay has a solid expansion strategy, strong finances, and a good dividend track record.
Carclo (LON:CAR) - turnaround situation that has rerated aggressively. Results probably not as bad as initial market reaction suggests (this has been a tough year for most operators) and there is potential upside from here - but there are also material risks to consider as well.
Timing - today's report is now finished.
Disclaimer -
A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).
A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!
Paul’s Section
Studio Retail (LON:STU)
(I hold)
296p (up 2% at 10:03) - mkt cap £256m
SRG, the digital value retail business, today announces its full year results for the 52-week period ended 26 March 2021.
PR title -
A transformational year for the Group
Financial highlights look stunningly good, I’m already intrigued -
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I’ve highlighted the very large rise in adj EPS. This looks to be a small beat against 43.71p consensus estimate shown on the StockReport. Although note from the graph below that this forecast was raised substantially quite recently, in April 2021.
Clearly this is a very decent performance, and I’m very surprised the share price has not risen more - it’s similar to where it was in Jan 2021, which seems odd to me - could be a buying opportunity, as the share price seems to be lagging the strong performance. Also the PER is only 6.6! What on earth is going on? Why that derisory rating? That implies profits are not sustainable at this level, which seems wrong, given the guidance is for profit to be only a little down this year.
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Unfortunately, I didn’t make a diary entry, so have missed most of this morning’s Capital Markets Day, having just caught the tail end of the Q&A. Hopefully they might publish a recording later? The strategy is to raise sales to £1bn in the medium term (currently £579m). If anyone else attended the CMD, perhaps you could add a comment about it below?
Findel Education business was sold for £30m in April 2021. So it’s now a simpler business, focused on the sale of a wide variety of home & clothing products through websites mainly
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Current trading & outlook - I see from the reader comments that this sentence has confused people -
The first quarter of the new financial year has seen Studio's product sales in line with the same period at the start of the pandemic last year, which in turn represents an increase of 51% on the first quarter of FY20...
Unpicking that, Q1 of the current year is April-June 2021. Product sales in that period are flat against April-June 2020.
FY20 is the period April 2019-March 2020. Therefore Q1 of that period would be April-June 2019. It’s probably easier to explain if I put it in a table using a notional starting figure of 100:
- April-June 2019 - notional level of 100 sales
- April- June 2020 - up 51%, so 151 sales
- April-June 2021 - flat vs last year, at 151 sales
I assume the 51% growth in sales in Q1 last year would have benefitted from lockdown 1, hence was a tough comparative for this year.
Therefore, matching that high sales level again this year, when lockdown was being eased, strikes me as an impressive performance.
Current trading - gross margin is significantly higher in Q1 of FY 03/2022 - this is important, because STU does seem to have a low product margin, which management indicated was c.35-36% at the moment. Remember the business model here is very similar to N Brown (LON:BWNG) - in that product is sold online, with the main focus being making profit from high interest/high default lending. Like an old school catalogue business, but moved online.
Product margin rates are c.340bp higher than last year due to the non-recurrence of Studio's significant discounting of clothing and footwear ranges seen at this point last year.
Although it doesn’t sound like the higher margins are expected to stick -
We expect that there will be a resumption of more competitive market conditions later in the year, alongside inflationary impacts on some raw material and shipping costs.
Outlook for financial services income -
Financial services revenue is up 15% in Q1, although this is expected to moderate later in the year. Studio is implementing changes to some elements of its financial services products this year to improve outcomes for customers.
Profit guidance - admirable clarity here, I wish all companies would provide profit guidance in this way -
At this early stage of the new financial year, we anticipate that Group adjusted profit before tax for the 52 weeks to 25 March 2022 will be in the range of £42m-45m.
Directorspeak sounds upbeat -
"The Covid-19 pandemic showed the resilience and agility of Studio, and we emerge from it a much stronger business.
"The changes over the last few years, to transform Studio into a digital value retailer with integrated financial services, meant we could react quickly to changing market conditions, and deliver record levels of growth in sales, profit and customer numbers...
"With the strong performance last year, and having sold the Findel Education business, Studio is in a stronger financial position and is now focused on pushing forward with a well-defined purpose that delivers great value, affordable products for our customers. The business has a clear growth strategy, fuelled by its digital capabilities, service enhancements, and ability to utilise data to drive better customer targeting, credit underwriting and product offers. All of this bodes well as we emerge from the pandemic and I am confident Studio can go from strength to strength and benefit all stakeholders."...
We have set out strategic plans to grow the Studio business towards achieving revenue of £1bn in the medium-term. The encouraging start of our current financial year against last year's challenging comparator gives us confidence in those plans.
Balance sheet - very similar to N Brown (LON:BWNG) the key concept to understand is that STU gives its customers expensive (APR 29-59% according to the conference call today) credit terms, hence there’s a large receivables book. This is funded with cheaper, longer term bank borrowings. There’s a high default rate on the lending to customers. High cost: high default in other words. That does come with regulatory risk, as every now and then the authorities decide to attack high cost lenders. You could argue it’s exploitative as well, which makes me a little uneasy.
Pension scheme - it says this today -
The Group is working with the trustees of the legacy defined benefit pension scheme to explore ways of removing any residual pension liabilities, for example by potentially acquiring insurance cover for some or all of its sections.
In the bizarre world of pension scheme accounting, this is shown as a £20.8m surplus on the balance sheet.
NAV is £84.9m, and if we deduct £22.8m intangible assets, NTAV is £62.1m. Personally, I don’t think that’s strong enough, and I would like to see the business retain profits for a few years, to make the balance sheet bulletproof.
That said, given strong trading, having a slightly weak balance sheet is not really a problem.
Dilution - during the pandemic? The number of shares in issue seems to have remained static, so looks like there was no dilution from an equity raise. That’s really good. Unlike N Brown (LON:BWNG) (I no longer hold) which did dilute with a fundraise. BWNG also failed to deliver growth, despite excellent market conditions, whereas STU grew strongly. It’s becoming very clear which is the better business!
Dividends - not being reintroduced just yet, but the company says it now has moved from a deficit into positive reserves at group level - which sounds like it now has dividend paying capacity. Personally, I’d rather they focus on driving growth, and strengthening the balance sheet.
My opinion - I’m really struck by the contrast between these excellent figures, and decent outlook, compared with the quite soft numbers and lack of growth recently reported by N Brown (LON:BWNG) . As previously discussed here, I started to worry about the big legal case BWNG is embroiled in, so decided it was too risky, and sold my shares. Buying STU instead looks like it was a good move.
I’m not really keen on these businesses which sell product online, in order to make a profit from charging customers high interest rate finance. I much prefer Asos (LON:ASC) (I hold) and Boohoo (LON:BOO) (I hold), Gear4music Holdings (LON:G4M) (I hold) which just sell product online, and have none of the complexities of managing an internal bank effectively.
Also, the default rates are so high on this lending. STU and BWNG seem to have very poor underwriting, in that they have to make massive bad debt provisions. Surely with all the data & information available, they could better work out which customers are actually likely to pay, and which ones are ripping them off for free stuff?
Overall though, I’m struck by how cheap STU looks on a PER of only 6.6 - that seems the wrong price to me.
Management plans to grow the business significantly seem to be working, and there’s a good buying opportunity here I think, for a re-rating. It’s priced like a bombed out, declining business, but is actually growing nicely and has ambitious management who sound like they’re doing the right things.
Who would have thought you could buy a strongly growing eCommerce business for a PER of 6.6?! There’s got to be upside on that valuation, providing nothing goes wrong of course.
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Saga (LON:SAGA)
(I hold)
404p (down 1%, at 13:24) - mkt cap £565m
This looks to be the last element of the recent financial restructuring.
This tender offer relates to the old £250m bond. SAGA has offered to buy back £100m of it, and has issued a new £250m bond (at a higher interest rate of 5.5%), but with extended maturity to 2026. Therefore once completed, this arrangement means SAGA will have £400m in total on its bonds. Bank debt will have been eliminated (although an unused bank facility continues), and plenty of cash on hand for any eventuality. Separately, its owned cruise ships are financed with ship loans.
Detail of the tender offer -
- £173.5m were tendered by holders
- The maximum SAGA wanted was £100m
- 57.261% acceptance, ie. tenders are scaled back to this level for everyone
- Repurchasing them at par
That all seems straightforward. It would make obvious sense for holders of the 3.375% bonds to tender them, and apply for the new 5.5% 2026 bonds, because they’ll get paid more interest.
My opinion - I much prefer bond funding to bank funding, so this is a good arrangement in my view. Bonds provide secure, long-term funding, without the potentially onerous covenants of bank financing. Our resident bond expert always pulls me up when I describe the bonds as free of covenants. Covenant-lite is probably a better description - so whilst there may be some covenants for specific things, it’s nothing like the financial covenants that banks impose. Therefore it’s much lower risk.
Clearer the new/old boss, Sir Roger de Haan, doesn’t want a repeat of the emergency refinancing in 2020, even if covid continues to be a problem.
The share price of SAGA is so volatile, I have long since given up trying to fathom why it moves in such large swings, up and down. It must be a stock that traders like dipping in & out of maybe? None of that matters. The reality is (see note from Numis for the figures), sooner or later, when travel is back to normal, this is likely to be a highly profitable business, priced on a single digit PER. Therefore it’s just a question of being patient, for what I believe is a probably 2-bagger or more from the current price.
Short term the price goes all over the place, probably due to newsflow about the pandemic, but it’s really just background noise. SAGA can tread water fine, since the insurance division generates enough cashflow to subsidise the travel division, for however long it takes.
Meanwhile with this latest bond/bank refinancing, management has greatly de-risked things, probably excessively in my view - this seems a belt and braces refinancing, which removes any doubt about solvency and dilution. Both look very solid & safe now. Yes the interest cost has gone up, but it’s now insulated from any interest rate rises for the next 5 years, locked into a fixed rate. That could look a smart move if inflation & interest rates do rise.
Lots to like here, looking post pandemic.
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Cake Box Holdings (LON:CBOX)
334p (up 3.4% at 12:53) - mkt cap £134m
The principal activity of the Group continues to be the specialist retailer of fresh cream cakes…
This is done via franchisees, who operate & finance the shops. Hence the revenues for CBOX itself look small, as you often find with franchise businesses, because it’s just the franchise fees, not the revenue at the shops.
PR title -
Another period of strong growth in an unprecedented year
These results look excellent - so good in fact that you’d struggle to spot that there had been a pandemic, demonstrating what a resilient business model this seems.
Key numbers for FY 03/2021 -
Revenues £21.9m (up 17%)
Adj pre-tax profit £4.7m (up 25%) - note that a £486k charge is adjusted out, for the cyber-security breach the company suffered
Adj EPS 9.6p (up 23%) - giving a PER of 34.8 - a punchy rating, but arguably justified because this is now a proven, resilient, roll-out of a successful retail format.
Dividends resumed with 3.7p final declared
157 franchised stores operating as at 31 March 2021
9 new stores opened in Q1 FY 03/2022, with 18-24 total expected this year - expanding at quite a clip
Kiosks now up to 21 - after successful initial trial
Online sales made up 22% of total revenues at franchisees - not bad
Balance sheet - looks strong, no issues that I can see.
Cashflow statement - looks fine, I can’t see anything untoward
My opinion - every time I look at this share, I like it more. As mentioned before, I do wonder how much profit is generated from initial sale & setup of new stores, since a substantial fee is payable by the franchisees? I reckon that’s where a hefty chunk of the profits come from. Therefore, once expansion stops, then profits could fall. That doesn’t seem a problem for now though, with expansion continuing.
Overall, this looks a very nice business. I think the big rise in share price is justified, with the share price currently looking about right to me. How much further upside is there from this level though? Probably not much, at least in the shorter term.
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M&c Saatchi (LON:SAA)
159.5p (up 8%, at 13:40) - mkt cap £195m
Unaudited 2020 final results & trading update
The Company today announces its unaudited results for the year ended 31 December 2020. The Company demonstrated resilience and agility in a challenging environment during 2020 and announces that trading is ahead of expectations for the first five months of 2021.
The 2020 numbers are so late, and impacted by the pandemic, that I can’t see any point in poring over the detail. Key numbers for FY 12/2020 -
Revenue £225.4m (down 12%)
Headline (i.e. adjusted) profit before tax £8.3m (down 52%)
PR groups nearly always make a lot of adjustments to polish up the headline numbers, so it’s always worth checking the statutory (unadjusted) profit before tax, which was a loss of £(8.5)m in 2020, on top of a similar loss of £(8.6)m in (pre-pandemic) 2019. Not good.
Guidance - unusually it provides profit guidance for H1 2021 -
Trading ahead of expectations for first five months of 2021. Half year Headline profit before tax expected to be in excess of £10m.
Management expects full year results to be ahead of consensus
Dilution risk - I’ve flagged this before, as a potentially major issue. Some ridiculous options scheme went wrong, risking large dilution. The good news is that the company seems to have got on top of this problem, which is greatly reassuring, and it no longer looks a serious problem -
Potential to reduce dilution from future share issues from c.19% to c.5%.
My opinion - not really something that interests me personally, because the historic accounting problems (and late 2020 accounts) still irk me.
That said, the greatly reduced dilution risk does look a potential game-changer. Plus strong current trading. So this share could be worth readers taking a fresh look at, maybe, if you can tolerate sloppy accounting.
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Jack’s section
Pendragon (LON:PDG)
Share price: 18.43p (pre-open)
Shares in issue: 1,396,944,404
Market cap: £257.5m
This is a quick pre-close update from Pendragon, a car retailer that de-merged from Williams in 1989 and focuses on specialist and luxury franchises. The group has grown since through a number of acquisitions. Marshall Motor Holdings (LON:MMH) and Vertu Motors (LON:VTU) have also updated recently, both reporting strong trading conditions, so this seems to be a useful part of the market to keep tabs on.
There are probably other areas of the market worth paying attention to at this point in time - freight and logistics come to mind, but if the present global logistical logjam is just a temporary issue then perhaps the window there is limited? On the other hand, companies suffering from supply issues might be overly optimistic on the situation.
Let us know if there are any other particular market sectors to monitor over the next year or two, in your opinion. For now, back to car retailers - these stocks are closely tracking each other, suggesting an industry-wide improvement.
As with the others, Pendragon appears to offer good value with a forecast PE ratio of 9.3x, a forecast PEG of just 0.2, and a Value Rank of 72. It actually trades at a slight premium to its peers, however, while suffering the same unavoidable low-margin characteristics that ensure these stocks will likely never trade at particularly high multiples.
Pendragon says it has outperformed in its new car markets in the second quarter and has ‘capitalised on favourable trading conditions’
Supply constraints in the used vehicle market and pent-up demand have increased vehicle pricing, driving higher margins. Marshall Motors recently made a similar comment.
Pendragon now expects to report underlying profit before tax of c.£30m for the first-half of FY21 (H1 FY20: underlying loss before tax of £31.0m).
Uncertainty remains heading into the second-half of FY21 with potential further disruption from Covid-19, an expected realignment of used vehicle margins and the risk of both new and used vehicle supply constraints. In fact the group comments:
Whilst the extent of the impact of the well-publicised semi-conductor chip shortage is not yet clear, it is becoming increasingly apparent there is likely to be some restriction of supply during the second-half of FY21, with vehicle order times already being extended.
Nevertheless Pendragon feels able to reinstate guidance. It expects group underlying profit before tax for FY21 to be in a range of approximately £45m to £50m (FY20: £8.2m).
Conclusion
So unless the group is building in some beatable assumptions, it foresees a less strong H2. Still, an underlying full year PBT of £45m would be good going for a £260m market cap. Applying a tax rate of 20% to that figure would give £36m of underlying net income or 2.58p per share. That would make for an FY21 PE ratio of just 7.14x.
Which would be comfortably ahead of consensus normalised FY21 EPS of 1.8p. Brokers have been nudging up their forecasts so perhaps more upgrades are to come.
The group does carry a fair chunk of debt. £181m of debt (ex-leases) at the last balance sheet date, set against £56m of cash. The business model is very capital intensive as well, so it lives on the edge and must be well run in order to survive, let alone flourish.
In fact, given the group is habitually cash flow negative, that is a concern. Particularly given that it paid dividends up until FY18. Yet there was no equity dilution or notable increases in net debt in this period.
Heading over to the cash flow statement, it appears that dividends were at least partially financed with the sale of businesses and assets. Divis have been halted, so perhaps this is an historical issue, but if Pendragon was to assume similar habits going forwards it would make me uneasy as an investor.
Still, no doubt the current trading environment is good for car retailers - probably better than what is presently priced in by the market - although we would also do well to be mindful of repeated warnings of H2 uncertainties and potential supply issues down the road.
Wynnstay (LON:WYN)
Share price: 501.33p (+8.98%)
Shares in issue: 20,137,949
Market cap: £100.9m
Again we find ourselves in good value, low margin territory with Wynnstay.
I would argue, however, that this is a superior longer term investment due to its consistent cash generation, rich dividend history, an operating track record stretching back to 1918, and a more robust business model (albeit one prone to short term cyclical swings).
This is a major supplier of products and services to the UK agricultural industry and the rural economy. It aims to grow steadily both organically and via bolt on acquisitions in what it says are fragmented markets.
A critic might say that growth has been too pedestrian in the past:
But there are not enough truly conservative investments out there in my view, and Wynnstay with its heritage, dividends, and rock solid balance sheet appears to fit that mould.
Shares were cheap for much of 2020 but have since rerated. I myself held until that sudden rerate but then sold to free up funds for similar opportunities in what were exceptional market conditions.
I suspect though that this could be a situation where buying and holding for a long time works out quite well. The question now is whether Wynnstay is in good enough shape to seriously test its share price highs of 650p or thereabouts.
The margins will likely cap short term upside beyond a certain point but this is a positive update nevertheless and the shares are up 8% or so.
Record pre-tax profit as sector confidence returns
- Revenue +9% to £249.71m, with c65% of the rise coming from commodity price inflation and a combined first-time contribution of £5.5m from two bolt-on acquisitions,
- Underlying PBT +23% to a record £5.53m; reported PBT +25% to £5.36m,
- Basic earnings per share +24% to 21.62p,
- Net cash (ex-leases) up from £1.28m to £4.01m,
- Net assets up from £4.87 per share to £5.04,
- Interim dividend +8.7% to 5p.
The group’s Agriculture division generated £180.72m of revenue (up 8.6%), with operating profit up 13% to £3.4m. Favourable weather conditions and farmgate prices drove a strong performance in Feed Activity, although Arable was weaker due to the prior year’s poor planting season. Wynnstay’s Glasson (a producer of blended fertiliser and supplier of feed materials and other products up in Lancaster) also performed well.
Specialist Agricultural Merchanting saw revenue grow from £62.83m to £68.88m, with operating profit before non-recurring items +13% to £3.4m. This is much the higher margin division and so good growth here has the potential to really drive the investment case for the company. Here, Wynnstay notes strong demand for bagged feed and a recovery in hardware sales ‘as farmers returned to investing in their businesses’, which is good to hear.
A commercial sales & marketing director has joined the group, ending a period of reorganization at the senior management level, and two strategic bolt-on acquisitions were completed on the eastern side of England.
Regarding the outlook, Wynnstay notes that ‘strong trading conditions support a good outturn in H2, with farmgate prices firm and 2021 harvest on track to revert to more normal yield and tonnage’ and is ‘very confident’ about longer term prospects.
Conclusion
Wynnstay continues to look like a sensible long term hold for the conservative investor. It has been around since 1918 and it has a reasonably low risk strategy of growing organically and via bolt-on acquisitions in a fragmented market that it has now specialised in for over a century. It has a broad spread of activities and a strong balance sheet.
While progress in the past has been slow and its business will always be subject to cyclical factors, the weather, and relatively low margins, the fact is it is currently generating record results so something is going well.
The group also references ‘clarity provided by the EU settlement’ - and Brexit concerns are something that have weighed on the shares over the past couple of years. Sentiment in the UK agricultural sector has greatly improved and trading conditions are very encouraging.
At some point, conditions will become less favourable but Wynnstay has the financial strength and sector expertise to ride out any such periods and has a good chance of growing profits and dividends attributable to shareholders over the long term.
The group continues to invest in its manufacturing capacity, it hopes to improve production efficiencies, and is already looking for further complementary acquisitions, so a good update.
Carclo (LON:CAR)
Share price: 53.57p (-7.16%)
Shares in issue: 73,419,193
Market cap: £39.3m
This is a turnaround situation that has been on a stellar run of late, outperforming the wider market by some 540% over the past year.
It’s a global supplier of fine tolerance, injection moulded plastic components, mainly for medical products. About a year ago the group offloaded a troublesome loss-making business called Wipac. Another driver of value has been net debt reduction which stands it in better stead to handle its pension deficit payments.
The subsequent rerating has been exceptional, with the company graduating from ‘nearly bust’ to ‘in recovery’ but you can see it has also resulted in a degree of profit taking so far this year.
If you’d followed the director buys at the time, you’d have done very well out of it. Buying into the dramatic improvement in StockRank would also have worked out well (all easy to say in hindsight, of course!).
Highlights:
- Revenue from continuing operations -2.7% to £107.6m,
- Underlying operating profit -33.8% to £4.8m; statutory operating profit up from £1.8m to £9.3m, with £4.5m of exceptionals,
- Underlying earnings per share -51% to 2.4p,
- Net debt excluding leases is down from £22.1m to £20.5m,
- Pension deficit marginally reduced from £37.6m to £37.3m.
Both the Technical Plastics and Aerospace divisions saw a reduction in both revenue and profits. Technical Plastics revenue -0.6% to £102.5m with underlying operating profit -0.4% to £9.2m (margin of c9%).
Aerospace was more heavily affected, unsurprisingly, with revenue -31.7% to £5.1m and underlying operating profit -66.7% to £0.55m.
Turnaround - new board recruited, simplified group following LED Technologies business disposal, and 3Y agreement on financing and pension contributions ‘provides a stable platform for the business to move forward’.
On 14th August 2020 Carclo concluded a restructuring with its main creditors to secure support through to July 2023.
Debt facilities comprise a term loan of £34.5m, of which £3.0m will be amortised by 30 September 2022, plus a £3.5m revolving credit facility maturing on 31 July 2023. Repayments amounting to £1.6m have been made in the period to 31 March 2021 (not part of the £3m due to be amortised). As repayments are made, the term loan facility reduces first, meaning that, at 31 March 2021, the term loan facility available is £32.1m.
A schedule of contributions has been agreed with the pension trustees through to July 2023. Beyond 2023 a schedule of contributions for £3.5m annually is in place until 31 October 2040, but is reviewed and reconsidered at each triennial actuarial valuation, the next being after the results of the 31 March 2021 triennial valuation are known. That is worth keeping an eye on. The defined benefit section is closed to new entrants.
Carclo aims to eliminate the deficit over a 20 year period, including £2.8m in FY21, £3.9m in FY22, and £3.8m in FY23. Beyond 2023 a schedule of contributions for £3.5m annually is in place until 31 October 2040. That’s quite a large proportion of operating profits at these levels so this is still a risky investment, in my view.
The 2018 actuarial valuation showed a deficit of £90.4m. The accounting valuation has generally been more generous, with the most recent accounting valuation a deficit of £37.3m.
Growth - Carclo is continuing to invest in the Technical Plastics business.
Despite the challenges presented by the COVID-19 pandemic, Group performance has enabled significant capital investment to be made whilst retaining a stable financial position, with net debt excluding lease liabilities as of 31 March 2021 falling to £20.5 million (2020: £22.1 million).
Commenting on the results, Nick Sanders, Executive Chairman said:
Despite a challenging period for the Group, the continuing businesses performed strongly in 2020/21 and ended the year on an improving trend… the Board believes that the operating businesses within the Group have attractive long-term growth opportunities, particularly within the medical diagnostics market where the CTP business is well positioned.
Conclusion
Despite the good progress and refinancing, financial health remains a concern.
There’s no doubt that holders have done extremely well here, though. The financial situation reminds me of Premier Foods (LON:PFD) a couple of years ago, which is now further along in its recovery. De-risking the pension scheme and reducing net debt does translate quite directly into increasing equity value (assuming no deeply discounted placings to dilute the upside).
It’s a very risky situation though, and the worst-case scenario is generally a permanent loss of capital, so that must be factored into the investment decision.
And operational turnarounds, even without serious financial considerations, are a source or risk themselves as they can be difficult to execute. To highlight this point, Carclo says:
The residual impact of the divestment of the Wipac division and related restructuring, refinancing and rationalisation of activities continued to be felt in the first half of the year, consuming significant Board and management time as well as incurring a high level of advisor costs.
It does add though:
This is now behind us, with the second half of the year benefiting from the Group's new streamlined and simplified structure and a clear focus on operational and strategic improvement.
With improving operational momentum and emerging from what has been a rough year for many, there is still potential here - particularly if Carclo can keep a lid on equity dilution. The initial market reaction this morning may have been a tad harsh.
This is a delicate situation with upside potential and no small amount of risk. There is the net debt and the pension scheme, plus the execution risk of the turnaround itself. It’s not a ‘sleep soundly at night’ investment. That can be fine, as long as you understand what you are getting into and can afford the risk.
There’s an investormeetcompany presentation on 2nd July, which could be worth signing up for in order to hear more from the management team.
Disclaimer
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51 comments
re £wyn a farmer friend of mine has just ordered his fertiliser for next crop and prices have increased 50%. Assuming Wynnstay work on fixed margin uplift then we should see an increase in turnover and profit for next quarter
There's talk this morning on the LSE board of a potential partnership agreement between BOO & GAP, relating to the store closure announcement from GAP - https://news.sky.com/story/gap...
STU: reviews on TrustPilot may be good, but its a different story on reviews.io (1.5/5) and reviewcentre(1.4/5). Were the negative reviews on TrustPiloted removed?
https://www.reviewcentre.com/r...
https://www.reviews.io/company...
Bad reviews seem to be normal for budget retailers though. Customers pay a lower price, but good luck if anything goes wrong or you want to return an item.
Re Wynnstay (LON:WYN) I see that following the update, house broker Shore Capital has upgraded its full year profit forecast by 15.7% to £9.6mln, and its 2022 estimate by 14.9% to £10mln.
Analyst Akhil Patel said: "We continue to remain positive on the group’s long-term prospects in a dynamic market and as such expect the business to expand going forward both organically and acquisitively to deliver shareholder value creation."
I hold and bought some more at this morning;s opening.
Richard
Looking at Studio Retail (LON:STU)
I don't normally 'zoom out' this far, but the monthly chart would suggest 320p is a key level to break. My buy zone would be 320p +5% (Personal opinion, not advice).
Ideally we get some consolidation first, just below that level.
Is that an attempt at the 'three mountain top'. Fails a third time then the tarot readers say 'not now sonny'.
Paul - I watched the Studio Retail (LON:STU) presentation and was impressed. They seem very confident of achieving the £1bn sales target and have a clear strategy to get there. I note your comment about the sales on credit. It works for them though , as apart from the financial services profit, they point out that the average cash customer spends £300 every 2 years (if I recall correctly), whereas the average credit customer spends £1,000. This demonstrates that the availability of payment plans drives sales volume and retail profit too. Receiving a monthly statement increases customer stickiness by driving traffic back to the site. Whilst making a payment, they may shop again, creating a virtuous circle for the business.
Here are my SCVR heat maps for today (prices as at ~10:15am).
I share these heatmaps with the intention of giving a visual indication of what is going on in the SCVR world: who’s reporting (and it's impact on the share price); and what’s moving more than 'normal'. There are no associated recommendations, implied or otherwise, just information. How, or indeed if, you choose to use that information is up to you. Please feel free to ignore them if you don't find them useful.
Please read my heat map thread for a great deal of explanation of how the heat maps are formed and how I use them to guide me with my research, and for a full key to the contents.
I very much welcome feedback so if you do have any feedback, not already covered in the heat map thread, it would be very helpful if you could post your comment in the heat map thread rather than the SCVR thread. The more specific and constructive the feed back is, the more that likely it is that I will be able to act upon it. Thank you all for the feedback so far.
Small / Micro Caps reporting today:
Big movers today in the SCVR world (moving more than a 20d EMA of the ATR against either yesterdays close, or today's open):
Warm regards, stay safe, and best of luck!
greensiax
Appreciate Paul doesn't analyse resource stocks on the SCVR but are there other subscribers who may hold Bushveld Minerals (LON:BMN) (I hold). This Vanadium miner and Vanadium Redox Battery developer were one of the top 20 stock picks (UK listed) in the Stockopedia 2021 Stock Picking Challenge. Performance year to date has been poor and today's 2020 results announcement saw a further decline in the share price of 4%+. Though there was an increase in Vanadium production volume from 2931mtV to 3842mtV (due to a full year contribution from a 2019 acquisition) this was more than offset by a 52% decline in Vanadium realisations. The net effect was a huge swing from 2019 profit to a 2020 loss. The business appears to have plenty of cash and sufficient funding in place for future development and claims confidence in its future prospects. Vanadium prices have picked up a little in 2021 and energy storage is increasingly a big story but is this stock another high risk speculative venture destined to fail? I would be interested in in any views.
suggest you start a separate discussion thread for £BMN
Yes I know that is more appropriate for a resource stock and I did think that there was a separate discussion thread for mining and miners. However I do find that Stockopedia has a bit of a weakness when trying to track down a specific topic not covered under the main menus. Any suggestions or am I missing a general search function on the site?
Hi ACouncell, on the old site there is a discussion tab you can use to see any chat about the company from its stock report page. Unfortunately for Bushveld Minerals (LON:BMN) the last comments were in 2018.
There still is a discussion tab on the new site but it does not pick up everything. This is a problem if it is just discussed within say the SCVR. The search could be improved on here. Here is one that is not in the discussion tab: https://www.stockopedia.com/ar...
Immotion (LON:IMMO) good trading statement out this morning. I know a few watch them (I’m long).
Good to see they are now profitable to the tune of £100k for June and expect a very strong Q3. Cash position ok and already invested in stock they require so doesn’t look like any placing needed/imminent to me. Should be beneficiaries of staycations in US and UK too.
What do you think about Cake Box. The FY results look good, with an increase in the number of franchisees and kiosks.
Can you do a review of Cake Box? Look like decent results for a franchise that is making steady progress. Testing kiosks in a supermarket has also been a success so far.
£WYN spread has dropped from 4.35% on 7 May to 2.17% now. Can anyone tell me if it moves around a lot, or is this a general trend in the right direction? The spread was one of the reasons I didn't buy in May.
The spread moves enormously on £WYN
It can be a fairly easy share to trade, as it is has been quite range-bound in the last 12/18 months
When replying to a comment Please please please, put in the name of the stock you are referring to. Heading up your comment with "in reply to xxxx" and no other reference means constantly scrolling down to find what company you are writing about. I am sure Paul has asked for this before, it makes life easier for all of us.
Agreed regarding posting without saying what about. So far today Anthony Ashworth, Caper4 and Honey Badger have posted about some company that I haven't a clue what it is and haven't the time to trace it back.
I have posted several times saying "There are 7 different ways of reading these comments of which 4 are not threaded. If you choose to read a threaded version please say which company you are referring to so that all readers will know".
timarr quite rightly replied "While agreeing it's irritating, if you're going to make this request you'll end up doing it every single day and often several times a day.
My view is that if people can't be bothered to add the company they're referencing then I can't be bothered to click through to find out what they're talking about. As said company is of no interest to me 99% of the time I've found this a highly satisfactory solution".
Jack/Paul - could you please paste up something about this to go with your existing disclaimer each day? There are always new people joining who will not be aware of the problem.
Sure thing sharw & Mr Jinks, we'll look to include a sentence in the disclaimer for this.
Thanks Jack
I write and read professional reports and once you get through all the guff and disclaimers etc can usually dump 90% of it so be careful with the 'bumf'.
Gives me a chance to bleat a request I made on 22 April:
"If at all possible, it would be great have the ability of a temporary 'hover' window appear that show the contents of 'In reply to' original post when reading a comment."
Hi turbo, a temporary 'hover window' to see what is being replied to would be a great idea. It would get around the problem of losing the red Unread box when you return after clicking the 'In reply to' button.
Hey turbo, sounds like a good idea - the best way of communicating with the team regarding this kind of software request is actually to use the green support button at the bottom right of the screen (on desktop). Unless of course that is how you did it back on the 22nd of April in which case it will already be in the system.
From there, colleagues tag these requests so we can gauge cumulative demand and the dev team can then discuss them in a more methodical fashion. Posting about it in the SCVR comments means it might get lost in amongst all the stock market chatter.
I'd recommend other users in this thread to follow suit as that's the best way of 'voting' for a certain feature.
Best,
Jack
this should be a request for the stocko team to resolve in the software imo, it shouldn't be a problem each user has to constantly think about.
would be easy for the app to know what tickers were mentioned through a reply-to chain and show these at the side for example...
prior art for this is everywhere you look,
every forum system over the last 20 years has shown a subject header on each post in a chain.
emails that you respond to retain the subject line and add a re: prefix.
this implementation of a messaging system just hasn't tried very hard to show how messages link as yet, but there are many widely used ways of solving this.
if you ever find yourself asking every user to do something very application specific every time the want to contribute, you can guarantee your design is flawed.
M&c Saatchi (LON:SAA) please
No figures from Lookers (LON:LOOK) yet. I still hold
Studio Retail (LON:STU) looks interesting if slightly confusing. I've not looked at it before:
https://www.investegate.co.uk/...
It's muddled a bit by the debt which, as far as I can see, is mainly credit for purchases. They've seen low defaults but are retaining their current bad debt expectations. Other than that it looks like core debt has been all but wiped out by the recent sale of Findel Education.
timarr
I was impressed by the finals from Studio Retail (LON:STU) (Studio Retail). It's been held back by uncertainty as to what Frasers will do with its majority shareholding (they have been selling down of late but unclear what they will do with balance), as well as concerns about potential defaults and regulatory risks.
My sense, however, is that the market just has this completely mispriced and is pricing in way too much risk. N+1 Singer note today it's on a P/E of 7 falling to circa 5 in 2023/24. That just doesn't make any sense to me given the growth that is being reported, as well as the ambitions being floated by management. Clearly, it will unlikely ever be highly rated, but I can readily see the argument for it rerating to a P/E of 10 which is at least 30-40% upside from here.
I'll be dialing into the capital markets day at 9am if I can. I think Paul has looked at this before so I'd be very interested in his thoughts, if he had time. Many thanks. Will
Timarr
I haven't looked as Studio Retail (LON:STU) before. Can you make sense of this part of the outlook statement?
"Current trading and outlook
The first quarter of the new financial year has seen Studio's product sales in line with the same period at the start of the pandemic last year, which in turn represents an increase of 51% on the first quarter of FY20.
I'm impressed that they have included full year forecasts.
At this early stage of the new financial year, we
anticipate that Group adjusted profit before tax for the 52 weeks to 25
March 2022 will be in the range of £42m-45m.
I haven't looked as Studio Retail (LON:STU) before. Can you make sense of this part of the outlook statement?
Me neither. I haven't looked closely enough to unpick that but I assume the first quarter of FY20 was actually about now in 2019. We're now in FY22?
The other point is, I suppose, that they're seeing no decline in sales even though their online business model would have been the place to be last year - so the reopening hasn't (as yet) caused any problems for them.
timarr
I have also been looking at Studio Retail (LON:STU), but I have been put off by the 300 Million Debt> With only 14.7 million Operating Profit that gives a pay back of 20 Years.
Having read Timarr comment above
It's muddled a bit by the debt which, as far as I can see, is mainly credit for purchases. They've seen low defaults but are retaining their current bad debt expectations.
So should I be worried about the Debt or not?
I have also been looking at Studio Retail (LON:STU), but I have been put off by the 300 Million Debt> With only 14.7 million Operating Profit that gives a pay back of 20 Years ... So should I be worried about the Debt or not?
Yes and no.
Most of the debt is to fund receivables - i.e. people have bought on credit and the debt is to bridge the gap between them receiving the goods and paying. So if everyone pays up then the actual debt is negligible. In fact, I suspect they'll be close to net cash.
However, there's a bad debt risk, which they have made provision for based on previous risk models. They note that those risk models may not be valid as we live in peculiar times but also point out that bad debt has been very low recently.
You pays your money and you takes your choice. But it does show that not all debt is the same and simple models don't work, especially when looking at businesses that issue credit.
Personally I don't like businesses that operate on accrued earnings. The research shows that these are far more likely to go wrong then those whose cashflow is concrete - but Studio Retail (LON:STU) looks like a good business if you don't mind that.
timarr
Studio Retail (LON:STU)
So should I be worried about the Debt or not?
You would be pretty foolish to presume that the debt is not ever going to be a problem , with debt you really need to DYOR to see if you think its an issue for you - you then pay your money and take your chance.
I would say there has been plenty of companies that have hit issues with regard to collections of money owed (cattles) so i would be slightly wary presuming if push came to a shove that this won't ever be a problem. However it may be that the market is unduly harsh in this regard so it may present a buying opportunity perhaps if the presence of this debt puts people off investing unecessarily.
If they earn their crust by "giving credit at good margins" i would also be much more wary that change in financial regulation might at some stage impact their business - the proof here would be would be would customer buy their products if they needed to pay cash ? or could they make a similar profit charging minimal finance fees if they are excessive now ? - i don't know exactly who owes money for what here so it may be a none issue the quality of their debtor book but i suspect it might not be good at best? i need to do more of my own DYOR in that regard.
Thanks, timarr, and rmillaree. I am even more confused now. But having just read Paul's positive prognosis, it's has pushed me over the line to push the buy button (51%:49%)
Don't forget the debt is securitised on the relevant receivables so the lender has no recourse to other assets should the receivables turn bad.
Morning all! I'm looking at Studio Retail (LON:STU) first. Fancied a bit of a lie-in, so am taking my time today.
Interesting points re the debt Studio Retail (LON:STU) carry to finance operations, I want to research their credit risk managment strategies to understand this more. I am very encouraged by both their:
The reviews compare very favourably with say Tandem (LON:TND), who's D2C sites have atrocious reviews and by the sounds of it, a very poor customer service due to product quality issues.
I bought a small opening position today in Studio Retail (LON:STU) on the strength of their website stats and customer reviews. I definitely want to dig into the debt/credit risk issue as well as the Frasers shareholding / intent. Another risk of their business model is competition from Klarna, AfterPay and similar 'Buy now, Pay Later' operators that have proliferated online in recent times.
Also worthy of note is their recent Data Insights hire, Gareth Powell. Highly endorsed, sounds like the real deal. He was head of data/analytics at TalkTalk and a certain N Brown - for 17 years. Concurs with their strategy of driving growth and innovation through the efficient use of data.
My morning smallcap tweet:
Pendragon (LON:PDG) PCF (LON:PCF) RA International (LON:RAI) Esken (LON:ESKN) Gulf Marine Services (LON:GMS) Immotion (LON:IMMO) Topps Tiles (LON:TPT) Getech (LON:GTC) Mercantile Ports & Logistics (LON:MPL) HSS Hire (LON:HSS) Eden Research (LON:EDEN) Urban Logistics Reit (LON:SHED), Infrastrata (LON:INFA)
Pendragon (PDG) guides H1 U/P pretax c.£30m (-£31m) and FY £45m to £50m as it outperformed the new car market and hiked prices of used cars. [SP=18.52 Cap=259m]
PCF (PCF) won't issue H1 by end June. [SP=23.8 Cap=60m]
RA International (RAI) wins contract for "the construction of camp accommodation for 1200 personnel, administration and service facilities as well as the provision of integrated facilities management services in support of the Colluli Mining." Start subject to approvals. No $$$ but guided $20m previously. [SP=56.31 Cap=97m]
Esken (ESKN) FY(Feb) loss £150.3m. Outlook: biomass energy - "gate fees, volumes and margins have continued to show an improving trend and the financial performance of the business is anticipated to return to pre-COVID-19 levels in the current FY"; Southend Airport - passenger traffic uncertain but logistics strong. Mooted £120m funding for airport to be signed in 'coming days'. Placing coming. [SP=25 Cap=158m]. I hold.
Gulf Marine Services (GMS) wins 3 contracts. Brings secured utilisation to 86% for 2021 and 50% for 2022. [SP=2.99 Cap=30m]
Immotion (IMMO) AGM stmt: small EBITDA profit in May then substantial one in June. Expects Q3 to be a period of very strong trading. [SP=5.19 Cap=22m]
Topps Tiles (TPT) LFL up 13% in Q3 cf 2019 but gross margins slightly lower than previous guidance. Outlook positive. [SP=72.4 Cap=141m]
GETECH (GTC) $536k contract to be billed this FY. FY still in line. [SP=24 Cap=16m]
Mercantile Ports & Logistics (MPL) guides FY(Dec) rev £0.75m. Cash & equvalents down to £1.7m end May. Accounts delayed until Sept. [SP=0.69 Cap=13m]
HSS Hire (HSS) Q2 U/L rev up 2% on 2019. Guides FY pre-IFRS16 EBITDA slightly ahead of market expectations and EBITA materially ahead. [SP=19.06 Cap=133m]
Eden Research (EDEN) FY(Dec). Current trading 'largely in line'. [SP=11.8 Cap=45m]
Urban Logistics REIT (SHED) £108m placing and PrimaryBid offer at 155p, a 5% discount, to invest in a "significant pipeline of attractive investment opportunities". [SP=163 Cap=416m]
In line: Infrastrata (LON:INFA)
Morning Jack. Would be interested in your thoughts on Carclo (LON:CAR) results out today., A turnaround situation? I hold.
My initial impression of the results released is positive, but less positive than had hoped for. Market reaction at the opening seems to be fairly harsh dropping 13%
another vote for Carclo (I hold). To me the results seem ok, but has had a very good run the last few months so expectations were maybe too high?
Carclo (LON:CAR) - I hold. Underlying operating profit of £3.3m in second half versus £1.5m in first half suggests good progress. Market reaction a little harsh.
Carclo (LON:CAR) so far so good results were to expectations as suggested by the company. Strong growth was also confirmed for the future and will hopefully be elaborated further during Friday's presentation, the link to register is provided below.
https://www.investormeetcompan...
I have provided a valuation in the below link, which I will be updated after Friday's presentation.
https://www.stockopedia.com/co...
As always DYOR
BSV
Wynnstay (LON:WYN) interims look very good, with all profit and dividend measures well up on last year., and look well ahead of full year consensus (H1 EPS 21.62p v FY consensus 33.8p). However last year's figures suggest some seasonality, with the first half being stronger. I would welcome some opinions more informed than mine. I hold.
Richard
This is a long term hold for me. One of only about 5 in my total portfolio. Impressive results which is reflected in the market today
Agree it looks like a big beat. Looking back over a number of years, and the seasonality is not so obvious. They also make a point of last year's bad planting season/poor harvest and that this year should be more "normal", so I think that also points to better H2 results. My fag packet calculations/cup half full approach led me to similar EPS projections for H2! Considering consensus is 33p for the full year, and 21p has already been delivered, I think there is a lot about which to be positive. Plus the acquisitions appear to be having an immediate positive impact.