Stanley Gibbons Group: dreadful results, uncertain outlook

Disclosure: I have no financial interest in the companies mentioned in this article.

Having been bearish on Stanley Gibbons for more than a year now, I thought I should comment on the firm’s latest interim results.

What a dreadful set of figures they were too.

Here are a few highlights:

• Net debt up nearly 50% in six months, from £11.5m to £17.0m
• Gross margin down from 57% in FY2014/15 to 48% during H1
• Stamp sales down 40% to £9.1m
• Trading profit margin on stamp sales down from 28% last year to just 4%
• Interim dividend cancelled, final under review

The firm has now admitted that its relentless and costly focus on acquisitions has caused management to take its eye off the ball at the group’s core stamp division. Chairman Martin Bralsford has pledged to reverse this decline.

I agree that the acquisitions have been overly-ambitious and highlighted the risks of Stanley Gibbons multi-year acquisition spree here.

However, I’m not sure whether the firm’s decision to blame acquisition distractions is just a smokescreen for a slump in underlying demand for rare stamps. Is the China-led boom in rare stamp collecting running out of steam?

In fairness, the company says that this year’s auction calendar is weighted towards the second half of the year, so sales could/should improve.

As various commentators have pointed out, the shares now trade close to their net tangible asset value of 90p. In theory, this should provide good downside protection. Stanley Gibbons should be able to generate some postitive cash flow to reduce debt by selling off some of its stock.

I do have a few concerns about the practicality of this approach, though:

• High value sales to the firm’s top 10 high net worth clients fell by 58% during the first half, compared to the same period last year. It seems likely that this is linked to the downturn in emerging markets, principally China. By the firm’s own admission, “ Trading performance in philatelic dealing is largely influenced by high value sales made to key high net worth clients.“.
• Debt has ballooned dramatically and is now 4.7 times 2014/15 operating profits. Net cash outflow during the first half was £5.5m. Net cash outflow from operations and capex was £17.6m last year. How long will the banks continue to fund this state of affairs before they demand some cash generation?
• Stanley Gibbons has £55m of inventory at cost on its balance sheet, but if the firm needs to use this to generate cash quickly and the market is soft, then big markdowns on normal retail prices may be required. This will effectively erode the firm’s NTAV, as it won’t be able to replace the stock on a like-for-like basis.

We’ll know more when we get a trading update for the second half of the year, during which the firm’s auction calendar looks busier.

In my view, this is a finely-balanced situation with little visibility for shareholders. Things could go horribly wrong, to the extent that a rights issue or placing may be required.

Alternatively, Gibbons could stop blowing cash on acquisitions and generate some cash instead, by delivering bumper H2 trading with strong sales of rare stamps and coins. Coins and medals are sold through Gibbons’ Baldwins business and appear decently profitable at the moment.

As far as I can see, good and bad outcomes seem equally likely, at best. That is why I still wouldn’t want to be long here.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.