Category Archives: Investment

Articles on investment topics, published on this website and on clients’ sites.

A falling knife.

Stanley Gibbons Group: coverage archive + updated outlook

A falling knife.Disclosure: I have no financial interest in any company mentioned.

One of the biggest investing disasters of the last year — among real businesses, not obvious joke stocks — has been stamp and collectibles dealer Stanley Gibbons Group (SGI.L).

The bad news came to a head on Monday when the firm announced a £13m placing and open offer at just 10p per share — a 50% discount to last Friday’s closing price.

Without wanting to blow my own trumpet, I’ve been consistently flagging up the risks with this stock since September 2014. The shares have fallen by 94% since then. I thought it might be worth gathering together a record of my coverage of the stock in order to show how the problems unfolded:

My record isn’t always this good. But the signs were there. Rising debt, poor cash flow, excessive spending on acquisitions and an accumulation of potentially overvalued stock.

I think it’s this last point that has persuaded investors to sit tight when they should have bailed out. Stanley Gibbons net tangible asset value has been a cornerstone of the value investing case for the stock.

The problem is that these tangible assets are stamps, autographs, rare coins and old furniture. In other words, objects with zero intrinsic value whose market value is highly subjective.

Stanley Gibbons is known in the trade for its high catalogue prices, which many other dealers consider excessive. I suspect the firm may have started to believe its own marketing. Rare stamps won’t climb in value for ever, just like stocks don’t. The rare stamp market crashed back in the 70s/80s. I suspect prices are falling again, as the China-led boom cools.

I’m not suggesting the firm’s inventories aren’t worth anything. Clearly they are, and the fact that they are booked at cost should provide some downside protection. But the firm recently commented that it is targeting:

a return to more disciplined buying and selling strategies which should help to improve the stock profile, restore the stock turnover to more normalised levels and thereby reduce the holding costs

To me this suggests that buying and selling have become undisciplined and that the firm may be burdened with stock it’s struggling to shift.

What next?

I’m pretty sure some value will emerge from the wreckage of Stanley Gibbons. If I did hold the shares, I’d probably take part in the open offer.

As I don’t own any, I intend to wait until the placing and open offer have completed and until Stanley Gibbons has published its next set of accounts. I’ll then take a fresh look at whether this could be a good turnaround buy.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A falling knife.

Worldview takes control of Petroceltic debt: what next?

A falling knife.Disclosure: I own shares of Lonmin.

In Las Vegas, they say don’t bet against the house, because the house always wins.

On the AIM Casino, it’s the lenders against whom you shouldn’t bet. They always win.

Over the last year or so, we’ve seen this with African Minerals, Petropavlovsk, Afren and Lonmin.

It now looks very likely that oil and gas firm Petroceltic will be the next firm to join this club. Earlier today, the firm’s lenders sold 69.44% of Petroceltic’s debt to Sunny Hill Limited at “a significant discount to face value”.

Sunny Hill is a company that’s owned by Petroceltic’s largest shareholder, hedge fund Worldview Economic Recovery Fund. Worldview recently made a very generous 3p per share offer to Petroceltic shareholders, but this was slapped down.

Inexplicably, the shares continued to trade at 10p on the morning after this offer was made. As I warned at the time, this provided a golden and probably final opportunity for shareholders to retrieve some value from their shares.

That door has now closed — permanently, I suspect. The shares are currently suspended as a result of Sunny Hill’s petition to an Irish court to appoint an examiner to the firm. This is similar to adminstration (UK) or Chapter 11 protection (USA).

Today’s announcement from Sunny Hill suggests that Worldview will now arrange a debt for equity swap for the remaining 30.66% of Petroceltic’s debt it does not already own.

Remember, a firm’s lenders have a right to be made whole (if possible) before equity investors are entitled to anything at all.

Petroceltic’s banks have already taken a substantial loss on this debt — it was sold to Sunny Hill at a “significant discount”. In my view, there is no way that the banks will let existing shareholders walk away with any value unless they are willing to stump up significant fresh cash.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A share tip circled in a newspaper share listing

Forget AO World’s mission to “redefine retailing” — it’s not the next Amazon and is grossly overvalued

Disclosure: I have no financial interest in any company mentioned in this article.

John Roberts, chief executive of online electrical retailer AO World declared today that the company is continuing to deliver on “our mission to redefine retailing”.

As far as I can tell, this simply involves undercutting the competition and making no profit. Mr Robert’s claim that by investing in marketing and undercutting the competition he will improve repeat business is nonsense, in my view.

Customers don’t show loyalty to a box shifter like AO, they just buy their next washing machine or fridge from wherever’s cheapest. If AO is always cheapest, it’s mostly because it appears to have abandoned all intent of making a reasonable profit.

Let’s look at some of the key numbers from today’s interim results:

  • Group revenue was up 21.7% to £264.3m
  • Group operating loss of £8.9m (versus £0.9m profit for HY2014)
  • Net funds down to £29.6m (HY2014: £43.9m)
  • Loss per share of 1.58p (HY2014: earnings per share of 0.12p)

The losses are of course blamed on expansion, specifically the investment in German growth and startup in new European territories, such as the Netherlands. So can we assume that AO’s UK operations are churning out free cash flow to fund this largesse? Sadly not:

AO World 2014H1 results summary (courtesy of investegate.co.uk)

AO World 2014H1 results summary (courtesy of investegate.co.uk)

Note that AO’s adjusted EBITDA margin — the most generous and flexible measure of profitability that exists — tumbled from 3.4% last year to just 2.0% during the first half of this year. As a result, AO’s adjusted operating profit for UK operations fell by 44.7% to just £3.1m on £248.6m of sales.

Interestingly, share-based payment charges only fell by 3.5%, from £1.3m to £1.2m. It’s good to know that 39% of the adjusted operating profits from AO’s only profitable division are being used to enrich senior management with stock options.

In a sense, though, my problem isn’t with AO’s thin profit margins. This is a tough business. For comparison, Darty reported a group operating margin of 1.7% last year, making £14.2m of post-tax profit from £3,512m of sales.

The problem is that AO is sub-scale and massively overvalued. Darty is valued on a forecast P/E of around 19, falling to 15 in 2017.

AO, which has sales of just 14% those of Darty, is valued on a 2017 P/E of 103 and continually pushes back the date at which it expects to make a profit. Consensus forecasts for 2016 earnings per share have fallen from 4.2p 12 months ago to -0.29p today.

Darty is valued on a price-to-sales ratio of 0.22. That’s reasonable for a firm with such low margins.

Why then, is AO valued on a P/S of 1.44? AO’s market cap of £686m is actually bigger than Darty’s £520m market cap…

Still a sell

I would add that I’ve been a customer of AO World over the last year. When we replaced our kitchen we bought a number of our appliances from the firm, benefiting from some kind of discount code and cashback offer which made them much cheaper than anywhere else.

The service was good, although we did get a telephone call a few days later giving us a the hard sell on an extended warranty agreement. Needless to say I said no, as despite the headline appeal of a promised lifetime new-for-old replacement policy, the policy on offer was far too expensive to make sense.

I suspect this is where what little profit the firm makes comes from.

The shares are grossly overvalued and remain a sell, in my opinion.

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.

Stamps

Stanley Gibbons Group: dreadful results, uncertain outlook

StampsDisclosure: 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.

Stamps

Stanley Gibbons: 4 reasons why things could get worse

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

I’ve been quite bearish on Stanley Gibbons over the last year.

In my view the firm has been exhibiting the characteristics of business riding an unsustainable bubble.

In this article I’ll explain why events so far seem to have vindicated my view and take issue with the more bullish stance taken by others, notably Tom Winnifrith and until quite recently, Investors Chronicle.

What I said

Back in September 2014, I took a look at the firm’s investment schemes and promotional offers, which I found unappealing and even slightly worrying.

I also explained why Stanley Gibbon’s role as a price setter (through its widely-used catalogues) means that it might be able to create price inflation to serve its own purposes, as long as it can find a ready supply of punters investment buyers and discerning collectors.

More recently, I took a dim view of the firm’s costly acquisitions and online investments in an article for Stockopedia.

What’s happened

Events so far suggest my view may have been correct to be cautious.

The firm’s shares have fallen by 65% so far this year, from 285p to just 96p. The latest trading update  — a profit warning, just 13 days after the previous trading update — has flagged up several of the problems I warned about previously.

1. New money drying up?

The number of high value sales appears to have fallen below expectations. The rare stamp market has been fuelled by new Chinese money over the last few years, but this supply of fresh capital may be slowing along with the Chinese economy.

Stanley Gibbons says that while it did manage to complete some high value sales during the first half, “sales achieved for the first six months were only at a similar level to the same period last year, despite the inclusion of sales from the Mallett acquisition completed in October 2014.”

High-end antique dealer Mallett is another firm that’s likely to have lumpy irregular sales, a costly inventory of illiquid stock and a dependence on new (overseas) money. So far, this £8.6m, debt-funded acquisition doesn’t seem to be paying for itself.

2 The illiquidity problem

For sellers seeking to achieve a top market price, like Stanley Gibbons, rare stamps are highly illiquid. The have no intrinsic value, generate no income, and have no meaningful utility.

In this week’s update, the firm says that “the weakness being experienced in our Asian operations and the continued illiquidity in high value stock items[my emphasis] are the main reasons it will miss full-year profit forecasts.

In my view this acknowledgement of the illiquidity of their stock is significant. The cost value of the group’s inventories rose by £11.6m to £53.8m last year. This is the asset backing to which Tom Winnifrith has referred frequently (most recently here, at about 9m30).

Much as I generally respect Tom’s views and analysis, in this case I must disagree. The value of these assets is highly subjective and subject to writedown if the market dips, in my opinion.

As Stanley Gibbons is currently demonstrating, it’s very hard to sell high-value rare stamps if the market dries up, unless you are willing to slash prices.

3. Margins under pressure

Stanley Gibbons shares are already trading at their net tangible asset value, but in my view this provides uncertain downside protection. Prices may have to be cut to get stock moving, and profit margins are already falling. In this week’s profit warning, Gibbons warned investors that:

“Gross margins and profits are expected to be substantially below those of the same period last year, which benefited from high margin sales of material sold from exceptional purchases of major collections.”

My reading of this is that Stanley Gibbons is having to pay closer to market rates for its stock than it has done previously. Thus the margin left for price cuts is much lower than it was. This is a classic feature of the top of a cycle.

I’ve worked a little in the antique and collectibles sector, albeit at a lower level than Stanley Gibbons. I’ve seen how the market value of an item can collapse, for no apparent reason. It’s just down to fashion, sentiment and availability of disposable income.

There is far less rhyme and reason to the valuation of such alternative investments than there is to shares, in my view.

4. Is the balance sheet safe?

At the end of March, Stanley Gibbons had no cash, net debt of £11.7m and a £5.8m pension deficit (all much worse than at the same time in 2014). On this basis, I’m not sure I can agree with Tom Winnifrith’s view that the firm has a “very solid balance sheet”.

In my view there could be further trouble ahead. At best I’d say it’s 50:50 as to whether trading will improve over the next 6-12 months.

I wouldn’t 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.