Straight in this week:
Angling Direct - Half-year Results
What's this? An online retailer that's growing? Increasing margins and sales simultaneously? You'll be telling me they're trading in line with forecasts next!
The Board remains confident that a combination of continued UK sales momentum and optimising European growth means that the Group is well placed to deliver revenue and pre-IFRS 16 EBITDA for the current year in line with market expectations.
And an omnichannel retailer where online is outperforming physical stores. Is everything we thought we knew wrong?!
Many UK online retailers have expanded into Europe and soon wished (or at least, their shareholders wished) they hadn't, but so far, things seem to be going well, with growth of 40%, albeit from a low base, and they have to take a margin hit to reach critical mass. There's even positive cash flow. Every aspect of the outlook statement is positive. The only thing is that, overall, Like-For-Likes (not given) are probably slightly behind inflation.
The biggest problem is that they are on 30x times earnings. There are a couple of reasons to think this doesn’t make them completely overvalued. The first is a large cash pile:
Strong balance sheet with Group net cash of £17.6m at 31 July 2023 (31 January 2023: £14.1m, 31 July 2022: £17.1m)
The second is that the costs of Europe are hiding a more profitable UK store network. Before cuts last summer, 2024 estimates were for 3.2p EPS, and investors may well be hoping that earnings recover to that level. This is probably less bonkers than hoping Gear4Music’s (which we looked at last week) EPS could recover to the 20.5p originally forecast for them, as Angling Direct is clearly outperforming as a business.
Argentex (AGFX.L) - Board Update
…announces that Harry Adams, Chief Executive Officer, has left the Company with immediate effect.
This is a very terse statement. No resignation here, just a leaving. And he is not thanked. The statement from the Chairman simply mentions changes to strategy and the incoming Interim CEO :
We have recently conducted a review of Argentex's strategy and have identified a number of areas of focus to ensure the continued growth of the business.
So, presumably, this is either a personal matter or the board is not happy with these aspects of leadership. But Adams is not just a CEO. He is a founder and 12.2% holder of the company. This gives him a range of options if he wishes to express his displeasure at his exit. Firstly, he could place his shares with institutions. If so, he would have been a lot better leaving when fellow founder Carl Jani left. If he placed his shares now, he'd get about 50p vs 80p that Carl Jani got. And the placing price didn't even act as a floor after Jani’s selling.
Of course, he may hang on to the shares, but to what point? Everyone knows there will be a significant overhang for the foreseeable future, and the share price will reflect that. If he wants to get spicy, he could call an EGM to remove the chairman and interim CEO and re-instate himself and see who the major shareholders support.
There are no good options for minority shareholders, who will probably be better off taking the short-term hit and getting out ahead of whatever Adam’s next move is.
Frontier Development (FDEV.L) - Organisational Review and Trading Update
Many games companies have been making redundancies. Frontier are now joining them:
The cost reductions will be achieved through a recruitment freeze, spending cuts and, unfortunately, redundancies, subject to consultation.
Cost cutting was apparently entirely predictable, but what about the trading update? The share price movement appeared to be predicting further weakness. So, this looks like good news:
The Board remains comfortable with market expectations for FY24
However, this looks bad news:
The cost reductions from the Organisational Review are expected to be fully effective for FY25.
It seems this update came as a surprise to broker Zeus, who were slow to provide an updated note. So, this announcement has the smell of an update intended to stop the share price falling rather than a detailed, thought-out plan. "Hey, I've no idea how much we can save or where, but let's have a review. No one ever got fired for having a review." It has done its job, though. For now.
IG Design (IGR.L) - Trading Update
This headline that IG Design leads with sounds too Partridge to be true:
Significant growth in profit and margin alongside strong cash flow
But the rest of the statement backs it up, although with no actual numbers. It is an inline statement overall, which presumably means this from Progressive:
They look cheap if they can hit 2025 numbers, but not 2024, so perhaps it is a little early to be crowing about an inline statement when EPS is still only a third of what it was before the company lost its way.
Strix (KETL.L) - Corporate Update
Losing your CFO on a Friday with immediate effect is never a good look. The company claim it is a "planned CFO retirement". This is strange since they don’t seem to have a permanent successor lined up and have only just started searching! If this is the usual standard of their planning, you can see why they got themselves running pretty close to their debt covenants. Speaking of which:
Strix also announces that it has proactively engaged and agreed with its banking syndicate a leverage ratio covenant relaxation to 2.5x in September 2023 and will then revert to 2.25x as at December 2023.
In our recollection, they didn’t really mention this in their last results presentation and gave the impression that the step-down was happening at the end of the year. Perhaps this is why the CFO had to go. Whatever the reason, we are not shedding a tear. She didn’t come across as particularly impressive in terms of presentation style or how the company’s finances have ended up.
There was no further profit warning, which investors always fear from a Friday RNS, and the dividend is being paid, meaning that the banks are now happy. So, we view this as a neutral update overall.
SCS (SCS.L) - Takeover & Final Results
Congratulations to long-term holders, it finally happened, and decent premium, too:
Under the terms of the Acquisition, ScS Shareholders will be entitled to receive: 280 pence for each ScS Share (the "Transaction Value").
The strange thing is that it happened now into what is looking like a big consumer recession, with the offer valuing the company at a P/E of around 20 and a P/TBV of around 2.5. They no longer have "net shareholders cash". Although, clearly, all that cash as customer deposits is coming out on the day they complete.
The buyer is a trade buyer, so there may be scope for Private Equity to outbid them. However, this is a bit too small for your average PE house, and the results later in the week mentioned LFL sales -4.4% in October, down from flat in September. Cash is also down £12m since year-end:
Resilient balance sheet, with forecasted cash of £57m as at 31 October 2023
So it seems management has timed this well and sold out just before the short-term numbers start to look bad.
The Mission Group (TMG.L) - Trading Update
It was a bit of a car crash this one. Materially below. Net debt soared. It is likely to be in breach of covenants in the future. Cancelled the declared dividend. Things have deteriorated fast. They were “in line” at the end of September. However, brokers appear to have downgraded anyway. Just nowhere near enough:
The problem is that the size of the debt means that they don't look cheap on any near-term forecasts despite a 60% fall in the share price in response to this statement. And there is no tangible asset backing. This may work in their favour as the banks get nothing if they put them into admin. But doesn't stop them from demanding a big rights issue.
XP Power (XPP.L) - Trading Update
In summary, trading was ahead in September and October, with the full year expected in line. This looks like the first time they have admitted that the inventory problem we have been concerned about requires action rather than being something that will normalise by itself:
An inventory reduction plan over the period 2023 to 2025 in the range of £10-20m, as surplus stock is progressively unwound in response to supply chain normalisation.
For scale, inventory was £106.5m at 30/6/2023. However, they do not say that inventories will require provisioning, which we feel is likely. Additionally, they also talk about the benefits of cost-saving, but not the one-off costs, including of redundancies:
…significant and wide-ranging operating cost reduction programme has commenced, including initial headcount reductions and restrictions on non-discretionary spend. The full year benefit of these actions in FY2024 is expected to be in a range of £8-10m.
So expect lots of exceptionals in FY 2023. Some of the other measures appear to be very short-term in nature, suggesting the cash crunch is at least as serious as we have been warning:
· Supplier payment terms standardisation in progress.
· Reducing discretionary capital expenditure to maintenance levels.
We are guessing that the latter changes will have been dictated by their lenders, or at least the lack of any reportable progress in talking to their banks:
The Group is also in advanced and constructive discussions with its lending banks regarding future covenant requirements and other near-term actions to strengthen the balance sheet. These discussions are proceeding as planned and we will provide a further update shortly.
Shareholders may be concerned by the phrase "other near-term actions to strengthen the balance sheet". This suggests a raise may be on the way. Still, while this was never the immediate concern, recent relatively strong trading is good news and helps firm the price of any raise. The company is worth considering further when the details of any capital injection are known and out of the way.
That’s it for this week. Have a great weekend.