A quieter week this week for in-depth analysis, partly due to a lack of announcements and partly due to summer! Those who need extra investment ideas can check out Mark’s latest Stockopedia articles here & here.
Small Caps
Sanderson Design Group (SDG.L) - Renewal of Licensing Agreement with Next
A renewal of an agreement rarely constitutes news outside of PR departments, but there are three things here that make it somewhat special:
It is with Next, a large and widely admired clothing and homewares company
The renewal is well in advance, from April 2023 for a winter 2023 range. While Next is not really about fast fashion and so will certainly be thinking about their winter 2022 range, winter 2023 is a long way off. If Next were in doubt about whether they wanted to renew, they could have deferred the decision for a while.
There are some hard numbers to announce, however small, in the form of guaranteed revenue.
Next's CEO has been quoted on the record.
The less good news is that there is a break clause after one year (albeit on both sides), there is nothing further on homewares, and we are not able to determine whether there was a gap with the previous agreement. Of course, the potential for licensing revenue may explain why they apparently didn't have much idea of their likely annual results in the last trading update.
The price action suggests that someone is using the volume generated by the licensing news to continue to sell down rather than reassess their position. This makes the shares better value. Although with the usual caveats about uncertainty due to inflation & consumer demand weakness.
Shoe Zone (SHOE.L) - Trading Update
Short and sweet from Shoe Zone
…since the publication of its trading update on 29 June 2022, trading has been stronger than expected due to higher than expected demand for summer products, particularly in the last two weeks. The Company has also continued to experience margin improvements as a result of good supply chain and cost management.
As a result, the Company now expects adjusted1 profit before tax for FY 2022 to be not less than £9.5m.
Two weeks of high-margin but low-value flip-flop sales cannot explain a £1m PBT beat. Especially since, according to Springboard, consumers spent the first week avoiding the high street (where they still retain the majority of the stores) in favour of airconditioned malls, and according to the BBC, they spent the second week in traffic jams and queuing outside airports. No, ShoeZone has beaten mainly because of something more fundamental about their offering and genuine momentum, meaning their forecasts were just too conservative.
We've been sceptical about this due to the type of people who have been promoting it rather than what the company has actually been saying, and this now appears to have been a mistake. There's some evidence that their repositioning has allowed them to address a larger customer base, perhaps including those trading down. At the same time, their history as a bargain basement means they have retained cost discipline. So some real momentum here and potentially forecasts that remain conservative. It is a rare hot spot in the current market, so congratulations to those who spotted it. The current price clearly factors in further upgrades, and investor irrational exuberance remains the risk here.
Reach (RCH.L) - Half-Year Results
The share price fell over 20% in response to these results, although it had bounced from its previous dip so this was overall not particularly severe.
As we have come to expect from Reach, they start with a lot of hot air. However, the real results quickly bring the balloon back down to earth:
So operating profit down 30% and net cash down 20%. Print revenue was always going to decline, so it is the Q2 digital revenue that is most worrying:
Perhaps they have reached the limit for the number of pop-up adds that any one page can host!
As usual, there is a large gap between statutory and adjusted profits:
The phone hacking payments look to continue for some time yet:
During the first half of the year, the progression of claims and the settlement amount have been ahead of historical trends and experience. This has resulted in a change to the provision estimate and a further charge of £5.9m in the year. At the period end, a provision of £40.8m remains outstanding and this represents the current best estimate of the amount required to resolve this historical matter. The majority of the provision is expected to be utilised within the next three years.
If you choose to adjust that out of the income statement, then the £40.8m really has to be treated as debt. Although this is a figure that doesn't seem to go away. Excluding restructuring also seems a bit optimistic, given that their whole business model is taking on legacy publishing assets and cutting costs.
Pension costs will be ongoing. Pension deficit funding was £23m for the half-year. But embarrassingly, they still haven't agreed on future payments with all schemes:
The triennial valuation for funding of the defined benefit pension schemes as at 31 December 2019 would usually have been completed by 31 March 2021. We have agreed the funding for three of the schemes, and the discussions with the remaining three schemes are ongoing, having been delayed by COVID-19 and more recently differences between the Group and the Trustees as to possible de-risking and the required pace of funding. We continue to be in active discussions with both the Trustees and the Pensions Regulator.
Ongoing disagreement with the pension trustees is bad news. Meanwhile, the H2 payment will be £32.1m:
Group contributions in respect of the defined benefit pension schemes in the first half were £23.0m (2021: £37.1m), under the current schedule of contributions of the five schemes. Contributions in 2022 are expected to be £55.1m under the current schedule of contributions for the remaining five schemes. In 2021, the Trustees of the West Ferry scheme purchased a bulk annuity and the scheme now has all pension liabilities covered by annuity policies.
If you take the cash, and net off the provisions and deferred consideration, then this is a net debt position of around £32m. The market cap at about 90p is £278m giving a £310m EV. Once you adjust for pension payments, free cash flow before movements in working capital can't be much more than £20m on an annualised basis at the moment. So the current FCF yield is around 6.5%. This doesn't seem enough to cover the obvious risks of a declining business.
That said, this has elements of cyclicality in it, both in the operating results and the level of shareholder excitement, so this has often looked like a good buy around the 50p mark.
FireAngel Safety Technology (FA.L) - Trading Update
This starts off well:
The Company performed strongly during the Period, with trading results expected to be ahead of the Board's internal H1 2022 budget.
But you quickly realise that this is remains loss-making:
The underlying loss before tax ('LBT') is expected to be materially better than the Board's internal budget at £1.6 million (H1 2021: LBT £1.5 million).
How bad must the board's initial expectations be? Well I guess they are used to disappointment by now! Overall, they say:
the Board expects the Company to meet full year market expectations
Which surely means either they expect H2 to be behind the board's expectations, or that the board's previous expectations were behind market expectations but they are only telling us now because an ok first half has saved them from their usual embarrassment.
Net debt is £3.8m, although they reckon they can get more by hocking their inventory:
At 30 June 2022, the Group had £0.7 million of cash and £4.5 million of debt excluding IFRS16 lease liabilities (at 30 June 2021: £5.9 million of cash and £3.6 million of debt), whilst the Company's undrawn Inventory Discount Finance (IDF) facility had capacity of £4.1 million.
In the last results they said:
Net cash (before lease obligations) at 31 December 2021 £0.1 million
So although the LBT was just £1.6m the cash flow was negative £3.9m. They now say:
Net debt was materially lower than budgeted and, as inventories build to meet demand, net debt is expected to return to forecast levels by the year end. The Company expects to generate positive cash flow in H2 2022.
Which reads as if they expected net debt to be much higher! We think they really mean that they expect net debt to reduce at the year-end, but this isn't entirely clear, and they have already shown that we can't really rely much on their expectations. The 9% rise in response to this trading update looks more like a triumph of hope over judgement.
CMC Markets (CMCX.L) - Trading Update
Not great news here:
Trading Update - Net Operating Income in line with 2022 levels
the cost environment remains challenging, and the Group now expects operating costs to be in the order of 5% above guidance provided at the time of the FY 2022 results.
The cost environment tends to be a problem when you "don't think about the costs".
Progress towards new business growth across all platforms and geographies continues as planned
This seems to be slow to us, though. Surely they would have preferred to get their non-leveraged platform ready for UK ISA season, not half way through the tax year. We are still waiting for the waiting list, for example:
It now looks more like they are having to throw IT resources at finishing the non-leveraged platform or agree large pay rises for key IT staff not to walk rather than general inflationary environment. Their staff costs were already forecast to rise significantly before today’s statement, and it’s not like energy & steel are big input costs.
The 20% down on 5% higher costs sounds about right for the market reaction to this. It isn’t obviously cheap compared to competitors such as IG Index.
That’s all folks, have a great weekend!