Holidays plus lots of news mean a brief summary email this week. Here’s a couple of highlights of what we discussed.
Paypoint (PAY.L) - Trading Update
The Group anticipates that underlying EBITDA will be in excess of £80m for FY24, year end net debt below £70m and underlying PBT in line with expectations, as outlined in our Q3 trading update issued on 24 January 2024.
This is an apparent beat on EBITDA (versus £78.8m forecast from Liberum) but actually in-line on net debt (assuming they are excluding leases as they have done in the past). The debt is sufficiently low for them to consider a buyback on top of their generous dividend.
The strength of this performance, underpinned by sustained strong cash flow and our confidence in the delivery of continued growth and achieving our financial targets, has enabled the Board to now have under active consideration a share buyback programme to further enhance shareholder returns.
The shares reacted positively to this, rising about 11%. Given that this isn’t a buyback, or even the annuncemnet of a buyback but a discussion about the possibility of a buyback this seems a little strange. In reality, it shows how bonkers the UK market is at the moment where a company produes a fairly continuous stream of good news which is sold into, yet the possibility of a buyback gets the shares rising.
The most interesting part is that this is yet another example of larger cap shares being no more efficient than smaller ones at the moment.
Focusrite (TUNE.L) - Interim Results
Focusrite have been rather accident prone lately. So we were looking for signs that a recovery was underway:
Demand for our flagship Scarlett product range is 50% higher than FY19 levels with end user registrations in line with the previous half year, such that we believe we are continuing to take market share.
Sounds good, until you realise it is delivered by dumping overstock, as they admit in the very next paragraph:
The Content Creation division has faced a particular set of challenges in HY24, with both macro-economic weakness and an oversupply in the channel, particularly as we navigate the transition of our Scarlett range from the 3rd to the 4th generation.
On Amazon, the discounted Gen 3 product is heavily outselling the Gen 4 product, hardly surprising given it is 40% cheaper. Camel Camel shows that's been discounted since July & more heavily discounted since mid December. This could go on for some time, as inventories are equivalent to about 8 months sales. They go on to say:
Though the industry outlook, particularly for Content Creation, remains tough, we remain encouraged by our product registration data which is comfortably outperforming the market. The sustained robust performance of our expanding Audio Reproduction division offers a positive counterbalance to the ongoing headwinds in Content Creation.
Again, product registration data means the channel is shifting stock, but that just means the consumer will be satiated.
With a series of planned product launches in the coming months and a continued emphasis on our strategic growth initiatives, which will lead to a greater weighting of sales in the second half, we remain confident of meeting our full-year expectations.
A second half weighting is always a concern. Looking at the balance sheet, there has been no apparent progress on the excessive inventory, but as they say above, registrations do bode well for shadow inventory in the channel.
The Group has a £50 million RCF facility split evenly between HSBC and NatWest which was renewed in September 2023 and is due to expire at September 2028, with an optional one year extension, together with an uncommitted facility for a further £50 million. As at the balance sheet date £36.2 million was drawn down from the facility (HY23: £26.9 million, FY23 £26.8 million).
There's no guarantee that uncommitted facility would be honoured which leaves them rather tight on the current trajectory of ever growing costs and inventory. This had started to look reasonable value following a big fall on the the last profits warning. However, they no longer do. A bounce in the share price combined with a deterioation of the balance sheet, leaves them on a debt-adjusted forward P/E of over 16. This is assuming they meet the forward expections, for which there must be some doubt.
Thruvision (THRU.L) - Trading Update
This is a revenue miss - £7.8m versus £8.1m guided. More concerningly, it looks like a significant cash miss - £4.1m versus £5.8m. However EBITDA is in line. It may be that the strong entrance security segment is higher margin. Also it may be that there was an inventory build ready for higher than previously expected H1 sales in this area, or alternatively some exceptional cash costs not mentioned.
…the worsening geopolitical climate resulted in very strong interest from the Entrance Security market, a trend we expect to see continue.
There is also a (fairly) unexpected interest from US aviation:
US Transportation Security Administration (TSA) has recently changed its policy to require increased security screening of aviation employees, which has led to a meaningful pick-up in sales enquiries which we expect to lead to new sales in FY25.
But the previous star of theft prevention in warehouses seems to be dead in the water as far as new sites are concerned:
Approximately 70% of revenue came from the Group's existing customer base, most of whom were upgrading to our WalkTHRU solution.
Perhaps the realistically addressable market here was much smaller than previously thought? Or perhaps existing customers are effectively trialing the latest tech before rolling it out to their other sites? The key question here is what type of customers are upgrading to WalkThru - the likes of Tesco which are already fully rolled out, or the 3PLs which are most certainly not.
The situation with US Customs and Border Protection remains complex. The previous-from-current funding bill for Ukraine back in February was linked to increased border security funding, but we believe this was absorbed by (metaphorical) firefighting the ongoing crisis rather than new investment.
The Group's multi-year CBP framework purchasing agreement remains in place for when Congressional funding support returns
Here's the good news though:
The fact that we are, post COVID, once again operating in four distinct end markets underpins our confidence in our future growth and our expectation that we will reach profitability in the short-term.
Could mean profitability in FY 3/2025. The problem is that even if they reach profitability in FY25 there’s no guarantee they won’t have a big loss in FY26 again. As such it seems almost impossible to value.
That’s it for this week. Have a great weekend!