Disclosure: 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.
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.