Space and People - the retail media expert

Tuesday, Apr 29 2014 by
14

SUMMARY

Bull Points

  • The company manages to pay off nearly £3m of debt over a four-year period; this helps to increase their liquidity position. This is shown in the improvement in the company debt ratio, high interest coverage and debt to equity ratio.
  • The company is continuing to pay an increasing amount of cash dividends, this year being 4.1p/share.
  • The company has successfully integrated their largest acquisition being Retail Profile Holdings in 2010 and the business achieved CAGR of over 40% ever since.
  • The company has continued to generate Operating Cash Flow that is higher than Net Income.
  • The Senior Management, in particular the two founders have a number of years of experience in advertising and promoting retail products in retail spaces.

Bearish Points

  • The company’s receivables, payables and net accrued/deferred liabilities have increased by £7m since 2010.
  • The Revenue per employee has come down from £172,700 in 2010 to £122,412 in 2013.
  • Despite paying down debt the company’s cash ratio is weaker.
  • Several indicators pointing to a trend change in the fortune of the business.
  • The company has increasing future lease obligation year after year, and the lease payment within a year stands at 21% of sales.
  • In their annual report 2013 they were optimistic about 2014 and three weeks later management issued a profits warning. 

 

My brief valuation target are as follows:

Gordon growth: 59p/share

Intrinsic value: 67p/share

My targeted price: 50p/share

INTRODUCTION

The company was founded by Matthew Bending and Nancy Cullen since 2000; both founders have experience in the shopping centre arena and have found an opportunity to create a viable media to help retailers to promote their brands by interacting and educating potential customers.

Among the other senior executives and independent directors in the business most of them have previous experiences in the retail sector.

 The business model consists of the following divisions: -

1. Venue, an area where the company helps local and global brands to provide services in visual merchandising in shopping centres.

2. Media buyers and brands, as an owner of promotional space the company help promote branding through their expertise, also to give companies the flexibility into choosing their themes.

3. Retailers, this is all about setting up Pop-Up shops and Kiosks.

Note that the company operates in two main geographical locations in the UK and Germany and also have a small presence in Russia and India.

 

BULLISH THESIS

1. The company has been paying off their debts ever since making their acquisition in Retail Profile Holdings. Below is a table showing debts being paid off:

 

Note (£000’s, unless stated)

2009

2010 (14 months)

2011

2012

2013

Other borrowings

 

1,985

738

455

205

Long term loan

 

1,140

958

730

 

Total Debt

 

3,125

1,696

1,185

205

 

2. The company been paying an increasing amount of dividends year on year as shown:

Dividends paid

(233)

(233)

(505)

(564)

(681)

 

And this year cash dividend being 4.1p/share equivalent to £800k, taking the cumulative dividends pay-out amount since 2009 to £3m.

3. Ever since the successful integration of their biggest acquisition the business financial performance has been like this:

 

CAGR

 

CAGR

Revenue growth (%)

40.2

Receivable growth (%)

27.3

Admin. Exp. (%)

41.8

Payable growth (%)

25

Op. profit growth (%)

35.8

Cash growth (%)

9.3

Comprehensive income for period growth (%)

34.9

 

 

 

The company’s revenue and net income achieved 40.2% and 34.9% in CAGR respectively and ever since the £6.5m acquisition this subsidiary has produced a cumulative profit over the four year period of £5.7m in absolute terms, so the payback period is approximately 5 years.

4. The company consistently have a higher Operating Cash Flow from normal activities than Net income as shown below:

Note (£000’s, unless stated)

2009

2010 (14 months)

2011

2012

2013

PAT

364

845

1,191

1,596

1,791

Op. CF

352

1,688

2,738

3,001

2,499

 

This is important when figuring out the quality of a company’s earnings and show that earnings manipulation is low.

BEARISH THESIS

1. As shown below the company receivable has increased by more than £3m and when measured against sales the ratio dipped sharply and has steadily increased again, could be a sign of deteriorating earnings. The company’s payables have followed the same pattern as receivable and the company now owe suppliers equating to 20% of net sales. The ‘NET’ accrued/deferred income is derived by deducting from prepayments and accrued revenue; this has increased sharply from 5 years ago and now represents 15.8% of total sales. The meaning of this is that the company have to service what they owed to employees, banks and other creditors (that includes clients paying up front waiting for services to be rendered) and could suggest the company is delaying payments and services.

Receivable (£000’s)

1,352

2,214

2,446

3,242

4,532

Receivable/sales

0.50

0.28

0.23

0.25

0.31

Payable (£000’s)

969

1,362

1,880

2,075

2,946

Payable/sales

0.36

0.175

0.176

0.159

0.2

NET Accrued/Deferred income

(46)

(782)

(1,468)

(1,739)

(2,302)

NET Accrued/Deferred income over Sales

0.02

0.1

0.137

0.133

0.158

 

2. A decline in revenue per employee year after year should mean lower productivity from the company year on year. This decline in terms of CAGR IS 6.6% and could explain the massive increased in accrued expenses and deferred income.

3.  The amount of cash the company has in terms of the size of their business has dwindled as shown:

 

2009

2010

2011

2012

2013

Current ratio (times)

2,759/1,304 = 2.11

4,623/5,527 = 0.84

4,165/5,206 = 0.8

5,858/5,813 = 1

7,027 /7,225 = 0.97

Cash ratio (times)

1,341/1,304 = 1.03

1,981/5,527 = 0.36

1,150/5,206 = 0.22

2,019/5,813 = 0.35

2,088/7,225 = 0.29

 

Analysts would have looked at this and say the debt was being paid off but I will rebuttal this because if the debt was being paid off then surely total liabilities would be reduced along with the cash assets, but the fact remains that the company’s other liabilities have increased  instead shows the company’s liquidity positions are being weaken.

4. Remember the company’s share price have decreased nearly 50% last week, well this could have been avoided if you’ve followed these ratios and deteriorating UK retail:

 

 

2009

2010

2011

2012

2013

Cash Flow on investment (%)

19.63

16.6

29

29.7

24.5

Op. CF/Sales (%)

13.1

21.7

25.7

23

17

Op. CF/Cash dividends

352/233 = 1.51

1,688/233 = 7.24

2,738/505 = 5.42

3,001/564 = 5.32

2,499/681 = 3.67

Retail

UK

£’000

 

3,945

6,125

5,739

4,489

The above is the earning warning signals of a possible deterioration of the business since their best performance around 2011, but as an investor in 2011 you wouldn’t have known the business was slowly declining in 2012 and in 2013 and based on the financial ratios in 2011 you would have bought in when the shares were trading between 50p-65p, intuitively you would have sold this year when the company’s annual report was released in 24th of March 2014 bagging a gain of over 100%-130%, but that is hindsight for you.

5. The company future operating lease payments obligations have been increasing as shown below:

£000’s

2009

2010

2011

2012

2013

Within one year

47

152

2,294

2,253

3,172

Between two and five years

18

3,783

3,825

3,534

5,978

Greater than five years

 

141

41

 

 

Total amount

65

4,076

6,160

5,787

9,150

One year payment/sales

0.02

0.02

0.215

0.17

0.218

2-5 years/sales

0.01

0.487

0.36

0.27

0.41

 

Although the future lease payment within a year stands at 21% of net sales, investors need to look at the 2-5 years amount because there has been spike up to 41% of sales from 27% of sales representing more than a 50% increase so I could predict next year obligation of payments within one year to represent 30% of sales.

So how did I derive this, you ask?

By looking back at in 2010 2-5 year future lease payment has shown a spike that represents 48% of sales from 1%, but the payment within a year stands at only represents 2% of sales, but in 2011 it has spike to 21% of sales. So by noticing a change in trend of 2-5 years you could predict with roughly what next year payment could be.

POSSIBLE RED FLAGS

1. The company in their annual report 2010 stated that the newly business could make the following contribution: “Retail Profile Holdings Limited contributed revenue of £3,967,162 and operating profit of £1,019,623 during the period from date of acquisition. If the acquisition had occurred on the 1 November 2009, consolidated revenues and operating profit for the Group for the 14 months to 31 December 2010 would have been £11,403,803 and £2,465,437 respectively.”

My Analysis

The acquisition date is 24/05/10, given that the end of year is 31/12/10; this gives it slightly more than 7 months, so annually revenue is £6.8m and operating profit is £1.75m with net assets being £0.9m. Looking at 2011 segment reporting the subsidiary only produced £7m of revenue and £1.329m of operating profit, also net asset is £0.946m.

Comparing apples with apples 2011 financial performance of Retail Profile Holdings compared with 2010 revenue is slightly higher, but operating profit has fallen by 24%,and has under-perform compared to the group company’s operating profit which has increased by 9.8%.

2.

 

2009

2010

2011

2012

2013

Share price average

 

(60p+48p)/2 = 54p

(50.2p+52p)/2 = 51.1p

(52p+76.5p)/2 = 64.25p

(76.5p+ 137p)/2 = 106p

Dividend paid per share

 

1.4p

2.44p

2.65p

3.1p

g=b*ROE

 

8.64%

8.7%

11.6%

11.3%

Share issued (000’s)

 

16,718

20,712

21,271

21,945

Market capitalisation average (£)

 

9,028

10,583

13,666

23,262

Tax rate (%)

 

28

26.5

24.5

23.25

Total Debt (£000’s)

 

3,125

1,696

1,185

205

Cost of Equity (%)

 

11.23

13.4

15.7

14.2

Cost of debt (%)

 

6.5

6.5

6.5

6.5

WACC (%)

 

9.54

12.20

14.84

14.13

 

 The way the company is estimating the recoverable amount of their ‘Cash Generative Assets’ (CGUs) is misleading because they’re projecting future cash flow 20 YEARS in the future, whereas normal practice being 5 YEARS; investors need to ask management how do you predict future (CF) 20 years into the future in a fast changing retail environment. My second concern is the company use of a discount rate of 6% to this, but based on the WACC (which is another way to work out the discount rate based on the weighing of equity and debt) it came in at 14.13% in 2013, therefore under-stating the discount rate by 2.3 times. Even before the share price collapse the (WACC) would be 13.53%. The company’s WACC in the last four years has been at least 40% more than 6%.

So why is this important to investors?

In compiling with IFRS the company needs to do impairment testing on their (CGUs) and if the recoverable amount is LESS THAN the carrying amount than the company needs to write-off some of the value of these cash-generative assets as an EXPENSE.

The company use of a lower discount rate and a longer time frame gives the company ability of valuing a higher cash flow amount collected over a longer period Remember a higher discount rate and a shorter projection period would equate to LOWER cash flow amount. So the recoverable amount could be lower than the carrying amount, therefore possible impairments are likely.

(The table above shows how I derived the WACC.)

VALUATION ANALYSIS

The following is the various conclusions of what the share price should be worth:

1. Using the GORDON GROWTH model; -

i). Based on current share price (75p/share), after the crash, the fair value is 59p/share.

ii). Based on the share price of (133p/share), before the crash, the fair value is 84p/share.

2. Using the INTRINSIC VALUE model; -

i). After the share price crash, the fair value is 67p/share.

ii). Before the share price crash, the fair value is 96p/share.

3. Using the latest trading statement to value the business; -

Using Edison Research as the basis of such forecast as a benchmark, the company stated the following:

i). Revenue is expected to be revised down to £18.2m (end of 2014) from £18.6m (projected) and Edison forecasted revenue to be £19.9m. All these estimates beat previous year revenue of £14.6m.

ii). The company gave lower pre-tax profit of £1.5m, though never gave what they were projecting pre-tax to be in 2014, but Edison has that as being £3m. So PBT would come to £1.5m in 2014 down from £2.62m in 2013, down by 40%.

iii). The company project net cash being excess of £1m without giving a forecast, this is significantly below £1.9m in net cash in 2013 and £2m below Edison guidance of £3m net cash.

And by comparing 2013 to revised forecast of 2014 in a table:

£000’s

2013

2014

Edison’ forecast 2014

Average share price in 2013-2014 (pre-crash)

Revenue

14,600

18,200

19,900

 

PBT

2,620

1,500

3,000

 

Net Cash

1,900

Excess of £1m

3,000

 

EPS

10.2p/share

7.5p/share

10.7p/share

106p+141p/2 = 124p

P/E

12.2

16.5

11.6

 

 

So using a 12.2 times earnings then the share price would be 91.5p/share. Given that the company doesn’t know what the specific net cash amount by saying it is only in excess of £1m IS NO PARTICULAR SURPRISE to me. Even though debt is almost being paid down you would have thought the company would be building up their cash position, but as I have pointed out earlier the company has future obligations in terms of payables, accrued expenses, deferred income and increasing amount of future lease payments that is due within a year.

Despite revenue increasing to £18.2m, expenses are increasing even more, coupled with lower net cash the company is fairly valued at 50p/share due to this being their first profits warning, the possible beginning of a decline in their business cycle and uncertainties in their business model.  


Filed Under: Value Investing, Stock Picks,

Disclaimer:  

By reading my articles and newsletters, you agree to use the research of Walbrockresearch.com at your risk. The purpose of this site is to educate and entertain readers. In no way, we are giving investment advice though the information provided is to my knowledge accurate at the time of the report. You should do your research, or seek advice from qualified professional investment advisors.

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SpaceandPeople plc is a United Kingdom-based media specialist company. The Company is engaged in marketing and selling of promotional and retail licensing space on behalf of shopping centers and other venues throughout the United Kingdom, Germany, France and India. The Company's segments include Promotional Sales, Retail, Head Office and Other. The Company markets, sells and administers promotional space in a range of footfall venues across the United Kingdom, including shopping centers, theme parks, garden centers, retail parks and airports. The Company offers a service covering from consultancy services to the provision and management of retail merchandising units in shopping centers. It enables venues to market, administer, promote and sell their promotional space. Its subsidiaries include MacPherson & Valentine Limited, SpaceandPeople GmbH, Retail Profile Holdings Limited, POP Retail Limited, Retail Profile GmbH, SpaceandPeople India Pvt Limited and S&P+ Limited. more »

LSE Price
14.5p
Change
 
Mkt Cap (£m)
2.8
P/E (fwd)
4.7
Yield (fwd)
8.6



  Is LON:SAL fundamentally strong or weak? Find out More »


5 Posts on this Thread show/hide all

TMFMayn 4th May '14 1 of 5
3

Orangetree,

I think you could be on to something with these numbers. I have looked at SAL but have wondered why the recent profit warning predicted net cash of £1m at the end of 2014, while the balance sheet at the end of 2013 showed £1.8m. Some £800k has since been spent on the dividend, but I can't reconcile how a supposed cash-generative business expecting pre-tax of £1.5m this year essentially won't improve its net cash pile. I asked this question at the AGM and the response from the FD was not that overly convincing (something about tax) and the situation you have highlighted with 'other creditors', accrued expenses and the lease obligations does not look straightfoward to me. It really should be with such a small company and the profit warning uncertainty etc for me to invest. Thanks for your efforts and research
Maynard

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Paul Scott 4th May '14 2 of 5
3

In reply to post #83137

They've been planning a fair bit of capex for a while now, to replace older, cheaper-looking kiosks with snazzy, modern, bespoke ones. This should make them stickier with the Mall owners. This has been planned for about a year, so it's nothing new, and from memory I think they said that the planned capex was about £1m, but that was at a meeting over 6 months ago.

I don't think there's anything funny going on here. They just ran into some significant problems simultaneously on a number of fronts. That's whacked the expected profit for this year, but it should still be cash generative & profitable. It paid the big annual divi a couple of weeks ago.

In my view management should be given the benefit of the doubt at this price. They had a very good 5-year track record up until about 2 weeks ago, and you often get bumps in the road with smaller, entrepreneurial companies. They know what has gone wrong, and are fixing things. So it's all about how they execute going forwards. It's possible there could be another profits warning, but due to the ungeared Balance Sheet, that's not something that worries me unduly as I intend holding long-term, and expect this to be a much bigger company in say 3-5 years time.

Regards, Paul.

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Orangetree 6th May '14 3 of 5

In reply to post #83137

Thanks for ur comment TMFMayn,

In my article I was just merely pointing out some factors that investors could have detected before the share price collapse. As this is a small company and more obscure than others they are sacrifacing the need to pay off their obligations, instead decided to return some cash to shareholders (Nothing wrong with that). But the main thing here is their obligations are builting up so it is not a surprise to me management will forecast both lower profits and lower net cash because 2014 will be the year they will have to pay off their EXCESS obligation and dividends maybe cut or suspended for that year.

But don't get me wrong the company probably has peaked and near their trough in their business cycle. To me the company share price could drop by another 20-30%,as Paul Scott mentioned their could be another profit warnings. After that this could be a buying opportunity probably in six or seven months time depending on management actions.
Thanks
Orangetree

Blog: Walbrock Research
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beatingmrindex 19th May '14 4 of 5

Great write up - very detailed and enjoyed looking through your blog.

Hargreve Hale continue to offload and have now gone below 12% (just seen RNS) - consistent selling is probably keeping price low and may drive it lower as they have consistently sold for nearly a month now....

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intuitive6191 21st May '14 5 of 5

An interesting post. I have looked at SAL a number of times and one line caught the eye.

“The earning warning signals of a possible deterioration of the business since their best performance around 2011”

This was probably my key concern and seemed a distinct possibility from the way the business was structured. My conclusion was that SAL is trying to do quite a difficult job in a market which is quite heavily constrained.

There are probably only a relatively small number of prime sites in the UK so the decision then is to progress into less productive sites or go geographically further afield. Both carry increased business risk and probably increased costs.

I was also concerned about the quality of recurring income. If each temporary retail contract is only 2 to 4 months then the animal needs to be fed quite often. There will probably be a retainer or contract fee from the venue but the main revenue will almost certainly be driven by occupancy. I viewed this more as a treadmill rather than a recurring income situation.

SAL has obviously been a good investment for those who got in early. I am not sure that this can be repeated in the future.


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