Good morning! Especially to the Liverpool fans out there.
The RNS is a little quiet for small-caps today, which is good, because I want to catch up on your suggestions in yesterday's comments section.
In today's news, I note that the FD of Sosandar (LON:SOS) has decided to step down and is swiftly replaced.
More to follow!
Graham
This report covers:
- Tandem (LON:TND)
- Warpaint London (W7L)
- Countrywide (LON:CWD)
- Cenkos Securities (LON:CNKS)
- N Brown (LON:BWNG)
Finished at 13:40.
Tandem (LON:TND) post-script
(Please note I have a long position in TND)
I realise that this stock won't appeal to most of you, but I just want to quickly mention the outcome of yesterday's AGM. What happened yesterday was very unusual.
The Non-Executive Chairman, Mervyn Keene, saw only 57% of votes go in his favour, with 43% against.
And the new Director, MA Taylor, was elected with just 59% of votes in favour.
You won't need me to tell you that this is an extraordinary level of dissent to see from the shareholders of a publicly listed company.
And it looks like these two Directors were only saved by last-ditch efforts to persuade the company's biggest shareholder to back them.
What exactly did they promise him? Impossible to know for sure. But the "Investor Day" and the production of results presentations might be important factors.
Warpaint London (W7L)
- Share price: 66.3p (+1%)
- No. of shares: 76.7 million
- Market cap: £51 million
A brief statement from this cosmetics group. The main point is that H1 sales have been "higher than anticipated, albeit significantly below the first half of 2019".
Does anyone else get the impression that companies might have been too pessimistic since lockdown? Many of them seem surprised by how much trade they've done over the past month.
Forecasting has been more or less impossible, though, and I don't blame them for being conservative with their forecasts.
As far as the economy goes, forecasts are about as useless as they've ever been.
The only strong conviction I have, when it comes to the economy, is that there will be a rebound, and that we will be "back to normal".
But I have no real idea how long it will take. It could be U-shaped, V-shaped, in the shape of a Nike swoosh, or in the shape of some other letter or symbol.
When it comes to investments, I simply try to avoid companies which need a quick recovery. I want time to be on my side - and I want the companies I own to be relaxed about the pace of economic growth.
As for Warpaint, its shares have looked inexpensive since last year (e.g. see the comments by Paul in August).
When I looked into its core brand, W7, I found that it was known primarily for being very cheap, relative to other cosmetics brands.
Its margins aren't too bad (gross margin 33%-35%) and it has generated some useful profits over the years, so maybe the cheap pricing is sustainable? But I have no idea if this is enough to create any sort of competitive moat.
Here's a video from a big YouTube account reviewing W7 products. It was released 3 days ago and has nearly 70k views already. Note how CHEAP is emphasised in the title:
Countrywide (LON:CWD)
- Share price: 100.86p (-0.1%)
- No. of shares: 33 million
- Market cap: £33 million
More evidence of the property market coming back and estate agents getting back to work. I don't invest in estate agents, but I do hold Rightmove (LON:RMV).
Performance
Countrywide reports income of £142.5 million for the first five months of the year (2019: £200 million).
All branches were closed from March 23rd, with branches in England re-opening from May 18th.
Adjusted EBITDA margin was flat at 5% and this is after taking a hit from the tenant fee ban. So without that ban, margins would have improved.
Trends in Sales and Lettings since the easing of lockdown
- Most existing instructions now have virtual viewings on Rightmove and Zoopla. All new instructions have this.
- Most branches (70%) have been risk-assessed and are certified safe. I guess the other 30% will be, soon.
- New instructions are now running at c. 90% of normal levels (depends on what you define "normal" to be).
- Exchanges are at 71% of last year's levels.
The other divisions are less interesting to me, so I'll skip them.
Balance sheet
As at the end of May our net bank debt was £55 million and our liquidity headroom was £64 million, benefitting from the deferral of VAT, PAYE and NI.
When the VAT/PAYE/NI bills are paid, liquidity will go down and net bank debt will go up.
I wonder to what extent the tax deferrals are responsible for the reduction in net debt since December?
Outlook
The company expects a similar bounce in Scotland and Wales. However, it does not provide formal guidance for the rest of the year.
My view
I don't see any attractions here, I'm afraid.
If you time your purchase right, you could do well, but this is emphatically not the type of business that I think is capable of compounding wealth for its shareholders.
LSL Property Services (LON:LSL) recently walked away from buying Countrywide, whose balance sheet still might require some surgery to get it back onto a stable footing.
Suggested by timarr yesterday:
Cenkos Securities (LON:CNKS)
- Share price: 52.4p (+2%)
- No. of shares: 56.7 million
- Market cap: £30 million
This well-known City broker is now trading at a small premium to book value. You could buy it at discount last year.
It has a great track record of paying out large dividends to shareholders in the good times. But we are currently in the bad times, with a lack of major deals, and the final dividend for 2019 was only 1p.
Things might be turning up again:
- revenue from Jan-May is up, compared to last year.
- fixed cost base is now "significantly lower" (CNKS also has a great track record of aligning its cost base with the revenue performance)
It's normal for the company to reduce its variable costs - staff bonuses - when deals are lower.
Reducing its fixed costs is perhaps a little more worrying. Does that mean it expects revenue to stay lower for longer?
The immediate outlook does at least sound good:
...we are currently working on several transactions for our clients, and with our potential pipeline, together with a lower cost base in place we are well placed to meet the challenges ahead and are cautiously optimistic for the rest of the year.
My view
There were soothing and encouraging words in the statement but it must be said that nothing was quantified.
Checking the company website, I see that the transactions this year are of a pretty decent aggregate size, so far. It does look like 2020 can beat 2019. We are still a long way from the mega success of several years ago.
If you are able to accept its lumpy, cyclical and unpredictable revenues, I think there are plenty of other reasons to like this company.
N Brown (LON:BWNG)
- Share price: 39.05p (-1.6%)
- No. of shares: 285 million
- Market cap: £111 million
This retailer is nearly 100% online now - 85% of product sales were online in the most recent financial year.
That will be of little consolation to shareholders, who have seen the value of their investment plummet.
Last year, I was surprised by how cheap the shares had already become, and thought it could have potential. But things went on to get a whole lot worse, not helped by Covid-19. So my optimism was misplaced.
FY Feb 2020 results weren't so bad: adjusted PBT of £59.5 million (down 29%) and actual PBT of £35.7 million. Revenues declined 6%.
Net debt at the end of February was £77.5 million (excluding the customer loan book). This was flat year-on-year.
Q1 FY 2021 (March - May)
Revenue down 22%, mostly due to lower product sales (down 29%).
Revenue from loans to customers, by contrast, was only down 8%. Cash collections are said to be "in line with prior year".
Trading improved towards the end of the quarter.
Operating costs fell 42.6% - a big achievement by management. Costs were cut in many different areas.
Liquidity headroom is huge at £148 million. Covenants for the £125 million RCF have been relaxed.
FY 2020 Guidance
There are a lot of moving parts:
Product gross margin pressure is expected to continue due to mix and the highly promotional retail market. Financial Services gross margin will decline as a result of previously guided regulatory pressures and an increase in bad debt provisioning due to the impact of Covid-19.
The Group is confident of offsetting at least 75% of the Group gross margin decline through operational cost savings with bad debt provision movements being the primary driver negatively affecting EBITDA.
My view
This doesn't tick my checklist in terms of quality but I'm still curious and open-minded as to whether it can pull through. It appears to be in a good position with its lenders, for now.
One thing I would highlight is the "highly promotional retail market" - there is so much excess inventory being dumped on the market, from retailers who couldn't sell their summer collections, that it is having an effect on the CPI.
And yet one or two companies (I thinking of £BOO) report strong and increasing margins. Is that brilliance, or is it too good to be true? I honestly don't know.
Anyway, good luck to everyone holding BWNG shares.
I have to call it a day there, but thanks very much for dropping by - Paul will be with you again next week.
Cheers
Graham
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