A flurry of activity this morning when I switched on my Blackberry to see trading updates from HMV and Vertu. Let's start with the bad...
HMV (LON:HMV)
The two pieces of news this morning were short and pithy, but no less significant. The first announcement was a trading update since the last one a mere seven weeks ago. In that period, profits will now be "moderately" below market expectations (which were £45m of PBT based on the median expectations - there must be some crazy stuff out for them to use median) due to "challenging" trading conditions. To compound matters, debt will not be less than £130m due to changing product mix and adverse working capital, and it now expects to breach certain banking covenants based on the full-year tests. The Company has commenced discussions with its lenders, who "continue to be supportive".
In the second announcement, the Chairman has stepped aside (to focus more on M&S presumably) and Philip Rowley has picked up the mantle with immediate effect. The shares dropped over 20% to 16.5p in early morning trade, giving the Company a market value of £88m. Before I starting writing this, my mind-set was to ditch HMV along the lines of 'run the winners and cut the losers'.
It's easy to paint a very bleak picture: tough trading, profits below expectations, covenant breach on the cards, debt higher than forecast, reduced cash generation, big sector/cyclical issues playing themselves out and the Chairman stepping aside.
Is there any Value here?
I have no idea what "moderate" means in terms of black and white (or red) numbers, but let's assume PBT comes in at £30m (two-thirds of median expectations - sounds moderate to me). Tax this at 28% and EPS equates to about 4p per share. The current share price of 16.5p equates to a PER of 4.1x. The dividend policy is to aim for say 3-4x times cover, so a theoretical dividend of 1p per share would be possible. The interim dividend was 0.9p, so rule out any further dividends in the short-term from an earnings perspective and in any event, the banks will not permit it if the Company has breached covenants or will breach covenants on a look-forward basis. EBITDA looks interesting given that that DA was about £45m…
I think it is worth mentioning that earlier this month there was a director purchase amounting to £138k for Vertu Motors (LON:VTU). It is also trading on a PTBV of 0.83. I think you're onto something with this share.
Too bad you also decided to water the weeds; by which I mean HMV (LON:HMV). It has monstrous gearing, and an unsustainable business model (IMO).
I notice that since you wrote your article Vertu Motors (LON:VTU) is up, whilst HMV (LON:HMV) is down. I think there's a moral here that it's better to go with stocks which you are bullish on, rather than back a stock just because it is el cheapo.
I would be interested if you were to do a follow-up in 6 months time as to how your two choices fared. I am guessing that it is likely that Vertu Motors (LON:VTU) will be up more, and HMV (LON:HMV) will be down more.
