N Brown Group: Big (discount To TBV) Is Beautiful

26th May '23 by Mark Simpson

11 comments 2609 reads

Ed recently introduced the Stockopedia Strategy Map, showing that there are many ways to invest successfully using the Stockopedia tools. In this week’s article, he discussed the concept of deep value investing, a strategy close to my heart. So as a follow-up, I’m going to look at a deep value stock from Benjamin Graham’s NCAV Bargain Screen: N Brown (LON:BWNG)

Summary

N Brown is an online clothing retailer specialising in clothing sales in a wide variety of sizes via the brands JD Williams, Simply Be and Jacamo. They also have a small homeware brand called Home Essentials.
The company trades at a substantial discount to tangible book value, with a P/TBV of just 0.38, after adjusting for post-balance sheet events.
The majority of these assets are represented by a £492m customer receivable book. Even after netting off provisions for doubtful debts and the debt secured against these receivables, they exceed the current market cap by some margin.
These assets are not particularly productive at the moment, though. Despite much earnings over the last few years, earnings are forecast to be just 1.7p for 2023, putting them on a forward P/E of 16. Their most recent ROCE I just 4%.
A court case with their finance provider over who was responsible for the costs of PPI misselling has hung over the company for some time but is now settled, with the company paying £49.5m to the insurer.
Frasers, the highly acquisitive retail group led by Mike Ashley, bought a stake recently, leading to speculation that N Brown (LON:BWNG) will be their next target.
The Alliance family own a controlling shareholding and was buying recently too. Presumably to avoid losing the company to an opportunistic bid.
The share price has dropped back down since this buying, perhaps due to read-across from poor trading of other online clothes retailers such as Boohoo (LON:BOO) and ASOS (LON:ASC) . So this could provide a good entry point for investors that believe these assets can be made productive again, either by the current management or in the hands of Mr Ashley.

Profile

N Brown (LON:BWNG) is a direct-to-customer clothing retailer. Today this means that the company sells online. However, its oldest brand, JD Williams, was founded in 1859 when James David Williams operated three mobile shops. In 1882 he began to send clothes via the…

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jonkingston

26th May '23

Great article, thanks.

John LA

Thanks for this, I think you are right its fits with Frasers strategy

TEIN

It's interesting to think of N Brown (LON:BWNG) as (give or take) first in and last out of mail order retail. It's certainly a historic business.

As a going concern however it's got little or nothing going for it, (because everything it can do someone else can probably do better or cheaper), unless that is someone can come along and repurpose the business. The credit book is what draws attention but maybe the e-commerce platform is of some interest to Frasers (LON:FRAS). I imagine they would massively cut costs as well and there would be significant operational synergies, but also a customer database to cross sell to.

I agree with you Mark, the strategy is in my view one of managed decline when if the business is to go forward, it needs, frankly, a turnaround plan.

I don't want to trash N Brown (LON:BWNG) though. It's a historic business, but with a moat that's largely dry and no plan as to how to fill it.

Thank you Mark for such as thorough analysis, there may be some special situation attraction for some, but it scares the hell out of me!

Edward Croft

27th May '23

Great piece Mark. The insider/outsider interest plus the Graham bargain angle have been catching my attention for the last few months. I've been thinking of buying N Brown for some time, but not yet pulled the trigger. I would imagine that the continual sideways grind has been shifting stock from weak hands to strong. Given this, the company might not need a catalyst for the share price to start moving higher. Time and the change in ownership structure may be laying the foundations. I'm weighing that off against all the negatives of course - well elucidated here!

Mark Simpson

Thanks Ed,

I think it is a situation that favours those who can correctly divine the intentions of the Alliances. Assuming they attend the AGM, it could be worth also attending and asking them directly. If they recognise the value of the loan book and have plans to leverage it for shareholders' benefit, then it could well be worth owning the equity. If they give the impression that they will try and trade the business in the same form for the foreseeable future, it may be far less lucrative a hold. This doesn't change the fact that the company trades at a discount to liquid assets, just that there is a big difference between that discount closing in under a year versus over the next decade!

ettrader

29th May '23

I've bought and sold these shares a few times over the past couple of years I've also tested them out for buying the branded goods mainly not their essentials. I was impressed on the quality of the goods to be honest I wear them and wash them over and over where they're stll looking good. There's something else they do use a value courier called Evri which doesn't have the best reputation but ordering online the service has been outstanding. I'd order say for example Sunday night they'd be on your doorstep by 3pm next day with free delivery. I thought wow this is good so order again and again every time it was next day never a bad order. The other aspect that is good which falls down with other oline retailers are the size guides, this site gets you to choose a premium brand where you type in what size fitted you best, you put in your size measurements and it gives you a pretty accurate profile so any itmes you check it knows your size so selects the right size automatically. My personal opinion is this company is pretty slick at what it does.

Right now I don't own any but if they dip under 25p I'd be tempted in again. The only concern I have is that this company could end up being a management buyout as the Alliance family own over 60% of the shares I believe. I think you'll find Ashley has sold the bulk of his stock as the Alliance's had over 50% when he started buying. The Alliance's will not let this go plus I think the only reason for not selling out to Ashley is that Ashley wants this business on the cheap and the Alliance's won't sell on the cheap. The question I've always asked is why don't the Alliance's do a management buyout? They've been over the 50% for years now, so the only reason I can think is that they're tax efficient because it's a listed AIM stock.

aflash

30th May '23

Thanks for reviving my interest. The rump remaining of my shares is down 61% so adding a few more will make a significant change.

Apart from the accounting argument from Mark and the quality comment from 'ettrader' , investing in the owners is worth something.

The biography of David Alliance 'a Bazar Life' is a fascinating story of persistence and risk taking. Neither the Alliance nor the Ashley family are working for Stockopedians' benefit but they have business acumen that in a bizarre way can benefit stakeholders.

roddy10

So N Brown is controlled by Lord Alliance - who is on the board but not chairman. It is / was in litigation with Allianz, which though it sounds similar is a totally different business (a German Insurance co). [Joshua Alliance is also on the board].

And the second biggest shareholder is Frasers which was Sports Direct but is not anymore. Frasers was founded by Mike Ashley who no longer runs it because it is run by Michael Murray who is Mike Ashley's son-in-law.

So in summary, a business NOT run by Mike Ashley, and NOT called Sports Direct has a stake in a business NOT run by Lord Alliance which is NO longer in dispute with Allianz which is NOT related to N Brown. (Oh - and N Brown passed away years ago).

Hope that is clear and helpful!

(PS Great writeup Mark).

Serious comment:

Page 58 - 59 of the annual report 2022:

Various senior changes:

New chair (existing NED moving to Chair) March 2021 - Ron McMillan - given he has been on the board since April 2013 usual practise is to leave after 9 years but in essence, as long as the existing major shareholder assents to it, it will not be an issue

General counsel:

- General counsel / company sec resigned Oct 21 (Theresa Casey)

- Interim General counsel / sec leaving May 22 (Christian Wells)

- new counsel (Michael Mustard) appointed March 22

CFO:

Rachel Izzard joined June 2020

CIO:

Adam Warne resigned Oct 2021

COO:

Nuno Miller appointed Nov 21

- note that he was chief digital and information office at Sonae Fashion

CEO of retail:

Sarah Welsh appointed March 2020

CEO of Financial services:

- appointed Dec 2020

I am still reading through the annual report but the reason I draw attention to all the above is that retail can often be about attention to detail, and to product / design etc. In this case I am a tad concerned re the changes - is it really about focus? And what does the CEO of the company do if there are separate CEOs of the retail and the financial services parts.

And why can I not see a 'product' person or a 'logistics' person on the executive team?

Given the issues with Allianz the change of General Counsel is 'interesting' - would need to dig into that more.

Caper4

6th Jun '23

Poor results and predictable market reaction. I don’t hold this share but it is looking attractive at this level, assuming a long term view. Obviously, a possible takeover target .

tiswas

22nd Apr

Down 50% since the article. Must be getting close to the point where the Alliances and Frasers want to do a deal to recover some of their losses but there again no reason it will not halve once more.

N Brown Group: big (discount to TBV) is beautiful

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Mark Simpson

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