Stock Pitch - ScS Group (LON:SCS)

8th Oct '21 by Jack Brumby

13 comments 5762 reads

ScS Group looks cheaper than ever amid resurgent post-lockdown trading but the shares initially fell by about 10% on the day of its most recent results. It seems as though the market can’t quite trust this furniture and floorings company, which has traded on notably low earnings multiples since listing back in 2015.

But the prospects certainly seem positive. Not only are customers getting back to physical shopping, some close competitors have either gone out of business or have reduced capacity as a result of lockdowns.

ScS trades at a discount to peers once you factor in the fact that it has nearly its entire market cap in cash on the balance sheet. The company has just reported FY21 underlying earnings per share of 41.3p, while brokers are looking for 30.8p of EPS in FY22 compared to a share price of around 270p. That makes for a PE ratio of 6.5x rising to around 8.8x the following year even before adjusting for cash.

The pressing question, though, is around the sustainability of this level of earnings. Shore Capital forecasts just 22.2p of earnings per share for FY23, for example - a marked drop that would bring the group back to FY17 levels of profitability.

So how long can present conditions persist, and what happens to the share price once pent up demand subsides and trading reverts to historic levels?

SCS was pitched to the Stockopedia Investment Club on the 5th October 2021 at a share price of 270p.

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About the Stock:

This is Scs (LON:SCS) , a furniture and floorings retailer that operates from 100 stores and nine distribution centres.

Its shares trade on the LSE Main Market and are currently priced at 270.5p. With 38,012,655 shares in issue, that makes the market cap around £102.8m.

Liquidity is acceptable for a small cap: a spread of about 100bps and an EMS of 2,000 indicates that about £6,000 can be reliably bought and sold at market prices.

The group has no debt or pension liabilities and cash of £87.7m, although £37m of this is customer deposits and the group says another £15m is retained as collateral for the credit insurance.

Still, if we take a prudent view of the cash pile as £35.7m (after deposits and collateral), that still gives a pre-IFRS…

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Potatoeboy

8th Oct '21

Excellent write up -many thanks.My biggest concern is 40% of product is imported from Asia so the increased freight costs (containers now 20k $ compared with 3k $ about a year ago) on these products results in a doubling of retail price to maintain margin.That clearly is not achievable so unless product can be purchased in the UK this would be a major headwind.I do hold SCS but this is my main concern.

JonBirdy

Great write up Jack. I also hold James and increased my holding yesterday.

Regarding your comment about increased shipping rates from Asia, do you not think this impact is in part factored into this weeks results as it has been the case for a while now?

Whilst no doubt a risk, Scs (LON:SCS) appears to have managed the current challenge well. But who knows about the future!

Hi Jon,I really do not know but as a guess i think (LON:SCS) must have sourced product more locally otherwise the margins would have been hammered by freight costs.

KevinS1

I held Scs (LON:SCS) from March up until earlier this week. I sold out with a small profit.

My main concern was that the winds are changing and with uncertainty around inflation, shipping etc I felt the risk was beggining to creep up - I only wish I had got out a few weeks back.

I also started to look at the long-term SP and it is currently above this - and was well above it when it was in the £3+ range. I began to question my own thesis - what has changed with this stock to think it can maintain that level of SP. It has been a very unpopular share in the past and it seems like much of the current momentum was coming form the private investors pushing up its price with the story.

I'd like to see it get through the next trading period before I would go back near it again - before then I think its a little too risky and as a very small cap it would take a hammering if it reports any bad news, or fails to deliver and/or if the markets do have a sustained sell-off.

I am moving more into larger Mkt Cap shares (not large-caps) where I think it is less risky on the near future - I've still got quite a few small caps, but where I see the risk/reward changing and can remove some risk I am doing so.

Best to all.

Rusty2

Thanks Jack. I hold.

None of your images, apart from the first one, are showing for some reason on my screen.

ridavies

Re Scs (LON:SCS) very good Jack thank you. A fair assessment. The freight aspect still has to unwind, and no one company I have seen seems to have quantified it so far as I can see when companies are reporting.

PS What are the hieroglyphics at intervals in the report? Is this a special internal Stocko Investment Club language? Makes no sense to me, and doesn't seem to come up again on the net on clicking.

PPS What were the % voting figures. I miss your usual pie chart.

Same problem as I'm having. At least it is not just me.

Hello RayStraw, I took a copy for my Word files and hey presto the turnip text turned into a golden coach with pretty pictures, graphs, colourful figures. Amazing what Microsoft can do!

It's ok now, it was only on this post, for some reason.

Norfolk'n'Good

Re £SCS

Is a more relevant question, What is the typical retail value of a full 40 foot container? Or how many sofas can you fit in a 40ft container?

Thanks for a superb write up on a stock I have owned for some time now.

Momoko Miyamoto

I reckon the UK consumer discretionary sector is gonna struggle over the next year or more. Furlough is over, taxes are rising, interest rates look likely to rise soon, non-discretionary items (e.g. food, utilities, petrol, rail fares) are rising in price rapidly. Almost nobody changes their sofa for at least 5 years or more so a lot of the bumper sales were likely sales brought forward from future years and won't be repeated anytime soon. Not to mention rising business costs: showrooms need to be heated and lighted (no price cap for businesses) , rising staff wages, rising input costs to manufacturers and rocketing freight costs. Are there even any lorry drivers left to deliver the sofas? The small historic profit margin could easily vanish. SP is still above the pre-COVID level and I see it going lower. The backward looking TTM valuation metrics are trap in my view, similar to the car retailers which also currently look outrageously cheap.

9th Oct '21

Re £SCS-

Depends on sofa size but approximately 40 sofas.So container costs have gone from £2500 approx to £15000.So shipping cost per sofa up from £62 to £380 approx.So a significant increase in selling prices required to cover this cost increase.As sofas are large bulky items the impact is much greater per unit than if we were dealing with iPhones.Hope this helps.

so how do they make a profit? Many of their sofas are under £500, quite a few around around £300. The figures don’t add up to me.

You should get around 50 3 seaters in a 40 ft container. But prices have almost halved in the last month.

Stock Pitch - ScS Group (LON:SCS)

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Jack Brumby

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