Why is Stanley Gibbons Group PLC giving away 7.5% to new investors?

Imagine being told that if you invested £50,000 in a certain equity investment fund, the fund’s manager would throw in a ‘bonus top up’ of 7.5%.

Sounds unlikely, doesn’t it? Yet that’s exactly what AIM-listed stamps and collectibles firm Stanley Gibbons Group PLC (LON:SGI) is promising its clients.

The firm, which is one of the world’s oldest and most influential stamp dealers, has marketed its stamp investment products with increasing intensity in recent years. The fact that its investment products are not regulated by the FCA means it can make sweeping and dramatic claims about cost and performance, with no hint of a disclaimer.

For example, a recent marketing email I received from Stanley Gibbon’s Group Investment Director, Keith Heddle, contained this gem*:

Those 30 stamps that were worth a total of £861,000 in 2005 are now worth £1,775,500.

That’s a 106% return in 7 years.

Imagine more than doubling your money in 7 years. And using rare stamps to do it.

Isn’t it time you found out more?

*I hasten to add that I am not suggesting that Stanley Gibbons’ marketing is in any way misleading or inappropriate. I am merely commenting on the freedom with which unregulated investment schemes can make more compelling advertising statements than their regulated equivalents.

Another email I received this week boasted that Stanley Gibbons offers “flexible investment structures with no management, transaction, valuation, storage or insurance charges” along with “a surprising rate of capital appreciation and consistency of performance over the long term”.

No mention of previous stamp price bubbles which have burst, as happened in the 1970s/80s.

However, the point I’d like to draw your attention to is the comment about ‘no management [or] transaction … costs’ — and that 7.5% ‘bonus top up’ the firm is now offering new investors.

How does it all work — and how does Stanley Gibbons make money from its investment customers?

The 7.5% ‘bonus top up’

There are two reasons why Stanley Gibbons can offer customers a 7.5% bonus and still expect to make a profit on the deal.

1. Price taker or market maker?

The annual Stanley Gibbons catalogue is an influential guide to the price of rare stamps. This means the company is, to some extent, a market maker, setting the prices of rare stamps and thus influencing both auction sale prices and retail sale values.

It is, therefore, in Stanley Gibbons’ interest for the prices in its catalogue rise as fast as the market will bear. This requires a regular influx of new cash into the market, to drive price inflation and enable previous investors to make a profitable exit. Hence the logic of a 7.5% bonus.

2. Profit ‘sharing’.

Stanley Gibbons offers two investment products, The Capital Growth Plan and The Flexible Trading Portfolio. In both cases, the firm charges no up-front fees, but takes its cut at sale time: the firm charges a sliding percentage of profits when it sells your stamps.

When you put money into one of the company’s unregulated investment schemes, the price you pay is the current Stanley Gibbons catalogue price.

When it comes time to exit your investment, Stanley Gibbons provides four options for its Flexible Trading investors:

1. Place the stamps into an auction of the company’s choice, usually one of its own. You’ll pay the usual auction fees (typically around 20%, in my experience of antique and collectible auctions).
2. Sell the stamps on your behalf, listing them at the current Stanley Gibbons catalogue price. You, the owner, will receive a sliding share of the profits, depending on how long you’ve owned the stamps. This ranges from 30% (up to 1 year) up to 80% (over five years). Any stamps unsold after 12 months will be purchased by Stanley Gibbons for 75% of the current catalogue price (see 3).
3. Stanley Gibbons will buy your stamps from you for 75% of their current catalogue price. This is likely to be the only choice if you need to sell quickly, but means that your stamps need to have risen by 33% in order for you to break even.
4. Post the stamps to you for you to sell yourself. In theory, this might be a good idea, but anecdotal evidence suggests that other, less prestigious, retailers often find it hard to match Stanley Gibbons’ catalogue and retail prices.

The exit terms are slightly different for Stanley Gibbons’ Capital Growth product, but the choices are similar. I’ve no idea of how liquid the market for the firm’s investment grade stamps is, but what investors may not appreciate is how generously they will share any profits with Stanley Gibbons, which benefits from being both a major dealer and a price setter, via its catalogue.

If prices have fallen, Stanley Gibbons won’t make a profit directly, but they will have had the use of your cash during the investment period, and they may have sold you the stamp for a 33% markup having paid a previous investor 75% of its catalogue value…

Nice work if you can get it.

Are Stanley Gibbons’ shares a buy?

Stanley Gibbons’ investment products are only part of its business: it remains a very important dealer, buying and selling from major collectors the world over.

The firm’s shares have been on a tear in recent years: today’s 275p share price is 96% higher than five years ago, although the shares have fallen by around 25% from their March’s 375p all-time high.

Turnover has risen by an average of 22% each year since 2009, while profits rose by an average of 7.5% per year until last year, when they fell, due to heavy investment in acquisitions and new IT platforms.

Analysts are bullish about next year and the firm’s shares trade on a 2014/15 forecast P/E of just 11.5, with a prospective yield of 2.9%.

However, my concern is simply that the firm’s rising revenue and profits are built on a bull market for an asset with no intrinsic value or use. For example, according to the firm, rare, investment-grade Chinese stamps have risen in value by around 500% since 1995, while their British equivalents (both defined by indices compiled by Stanley Gibbons) have climbed around 400%.

Given such strong, long-running gains, some degree of pull back, if not a full-blown crash, seems likely at some point, as happened during the 1970s and 80s, when rare stamps did fall in value.

It’s rather like a castle built on sand, in my view: I believe Stanley Gibbons’ cheap forecast P/E should be viewed in much the same way as those currently enjoyed by housebuilders — an inappropriate, and potentially misleading, way to value the stock.

An alternative valuation would be the firm’s net tangible asset value, which is just 110p per share — and even that could fall if the value of stamps (inventories are running at around £40m, historic cost) were to fall.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any investment decisions.