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Dan,
If I was trying to ascertain what our cash position will be in Nov, then yes, averaging would be a stupid thing to do, but it has a use in establishing a shortfall over a 12 month period. Does it tell us everything we need to know? No, but neither do your calculations. If I wanted to estimate how much cash we'll likely have in November, I'd do my own cash flow forecasts based on different scenarios and I'd use bracketing to give a lower end estimate (for a realistic worse case scenario) and a higher end estimate (for a realistic best case scenario). It's not a difficult thing to do, but it would be time consuming and pretty useless in this circumstance as the brackets would be so far apart. I imagine the bracket would be something like £10m-£70m. What use is that to anybody? Hence why I'm prepared for any situation to unfold. I'm not just going to make an educated guess. Imagine if we have a 4 month lockdown covering Oct, Nov, Dec and Jan 22. What use would your calculations be then?
I assumed that the business had been putting cash aside from May, yes. Obviously it isn't as simple as accumulating the same amount of cash per month. I should have made it more clear that that's not what I meant. I understand the confusion now. I can't recall my original post now, but I was basically looking at the company over a 12-month period (say June 2021 to June 2022), which of course, would eradicate any seasonal fluctuations. The question I asked myself was 'do we absolutely need to raise £70m via an RI?' The short answer was probably not, because as you've said, we should be in a strong cash position in January. The 3 most likely things to make a £70m RI occur imo: 1) As you've pointed out, we may need to raise a significant amount of capital for the production & sale of Xmas stock (I haven't attempted to calculate this yet), 2) A black swan event, such as another lockdown and 3) Darcy may decide that reducing gearing should be prioritised as it would open the door for institutional investors and reduce risk. However, I do think that Darcy would have announced a raise at 90p+ if #1 or #3 were his main concerns.
On your point regarding liquidity, as I've said countless times now, it's really not a concern for me. Having to raise £70m due to a short-term liquidity issue is completely different to having to raise £70m to prevent a business from going bust or from paying a £5m fine that the business can't realistically afford, because in the former situation, the £70m would be reflected in the balance sheet after the stock had been purchased and sold to customers. The market would then correct itself, and as shareholders, we'd likely be no worse off. In fact, we'd likely be better off as a stronger balance sheet should theoretically command a higher P/E.
I shouldn't have been so lazy in my initial explanation, but it was a very rushed post with a limited purpose
Originally you were saying the business has been putting cash aside from May and then using linear trading (even though the business is seasonal) you calculated that there will be increasing cash each month. That isn't true as the CFO says cash is higher at certain points of the year
We know payments to the bank start in November (RNS) but as I say to you this will be a low cash period for the business as we are buying stock. Instead as you've assumed linear cash generation you happen to think cash should be up by then ticking up nicely at £3.5m a month. When actually in the real world we will likely have less cash in Nov not the extra £20m you've calculated
You see you're understanding of the business and cash and use of averaging is just silly. Why try and defend it?
"What use is even a 6 month period to me?" well for one it will help you realise when the raise might come and also what size it would be. Again independent advice (people on the inside) estimate £70m but your linear approach to cash generation has it at c.£20m. Why? Again as cash doesn't come in a linear fashion and not every £ of profit converts into cash (the business reinvests)
"Please tell me how much money we're going to spend on Xmas and Valentines stock," well you can rough have a go at this. You can see (from todays annual accounts) the skew of revenue to Christmas and you know the margin. So you have the components to calculate the rough stock requirement for Christmas
"how much cash we're going to have in the bank in November and December" - rough calc cash we have now less the number you get to above (cash being inverse of NWC)
"averaging is for idiots, please tell me what our revenue and costs are going to be for each month from now until July 2022" - you don't need this. The point is you've underestimated the cash pinch in Nov/ Dec. After Dec the business will be cash rich
"As said above, I am averaging, because unlike yourself, I am not trying to establish what our cash position is likely to be in November" - well you should as otherwise it's for 0
"I haven't assumed flat income, I was merely treating CF as if the company has a flat income in my calculations, as that allowed me to roughly estimate how much equity we may need to raise" - again this is a huge misunderstanding. The equity raise is related to liquidity. The need for the £70m in terms of liquidity will be greater at certain points than others. Why? Because of NWC. This is why you're getting £20m as an asnwer and the independent analysis is getting £70m. Working capital is also a HUGE factor which you're ignoring as you're assuming linear cash generation of £3.5m a month. If Card buy say £30m of Christmas stock thats a big difference to cash but again none existent in your world
"We could establish that the company likely needs to raise, say, £20m" - yes you could if you assume linear cash generation and avoid NWC
Dan,
That'll be my last post on this subject as I don't wish to waste anymore of my time on such a pointless discussion
Genius Dan,
I really fail to see where you're going with this. Why do you think I'm unaware of how a seasonal business works? I'm not using averaging to establish what CF's cash position will be in November. As I've already explained, I don't care. Ironically, one of the main reasons why I use averaging with CF is exactly for that reason: IT'S A SEASONAL BUSINESS. I'm only concerned with how CF perform in each financial year. What use is even a 6 month period to me? If such information was useful to me, I'd have already included it in my calculations. Now, instead of trying to insult me, why don't you educate me? Please tell me how much money we're going to spend on Xmas and Valentines stock, how much cash we're going to have in the bank in November and December, and as averaging is for idiots, please tell me what our revenue and costs are going to be for each month from now until July 2022. May as well just do a full cash flow forecast, but make sure you include 'very low' in your calculations to ensure accuracy. Cheers.
Dan, if I was concerned about how much cash CF will have in November, I would have already done a cash flow forecast based on educated assumptions. This might surprise you, but at uni, I had to analyse company accounts and cash flow forecasts on an almost weekly basis. I also had to cost and value multi-million pound investments based on my own assumptions and comparable evidence, so I am quite capable of GCSE-level maths and estimating. As said above, I am averaging, because unlike yourself, I am not trying to establish what our cash position is likely to be in November. My concern is whether or not we're going to remain solvent, and averaging is more than sufficient for that purpose. What use is knowing how much cash we're likely to have in November when we don't know how much the banks are going to request from CF in Nov and Dec? It's a completely pointless exercise imo.
I would presume that the banks would request a cash flow forecast from the company, which they then analyse and scrutinise, before analysing their accounts from recent years. I would expect that they would then create their own cash flow forecast, which they would compare and contrast with CF's forecast. That's what a chartered surveyor would do, anyway. The problem here, however, is that I'm not a bank and I don't have access to their forecast, so it's mostly irrelevant to me until CF inform us of the details in a TU later this year. I haven't assumed flat income, I was merely treating CF as if the company has a flat income in my calculations, as that allowed me to roughly estimate how much equity we may need to raise. Yes, that figure could change significantly for a whole variety of reasons (of which we have already mentioned several), but I'm not concerned about that. We could establish that the company likely needs to raise, say, £20m, but they could still raise £50m... again, making a detailed projection a complete waste of time
it is "very low" when you consider to normal business which would generate a debtor was my point. This business turns stock into cash instantly for the vast majority of transactions. A typical business turns stock into a debtor which typically pay you 30 days from the month end (so average 45 days) and then cash
Tovers has shown you the revenue difference which again shows you can't average a SEASONAL business! yes things are unknown but you can make educated assumptions around them not just ignore them entirely which is what you're doing. if you were trying to make a point over a bullet payment in12 months time you'd be correct (as all seasonality is neutral over a 12 month period) but here we are trying to see how much cash Card might have to November and your view of averaging is just because you're not smart enough to account for seasonality - it's just wrong
"My original point was that I used averaging, because there are so many unknowns in the equation, and if you start using incorrect numbers in calculations that involve millions of pounds, the compounding effect can often leave you with numbers that are significantly more misleading than if you simply used averaging" - no as when it gets to the summer months the effect of seasonality inverts which is what I said
You think banks who monitor covenants month on month are just averaging revenue? No they take an educated view on how trading occurs. Items such as VAT are paid quarterly so it builds for two months and then paid. A NWC profile element
You didn't say "full of cash" but your averaging give you the calculation that the business will have excess cash in November but again as I say this is because your assuming flat income across the year when that isn't the case. Again it's a seasonal business and you can't assume. Your conclusion of spare cash in Nov is as you've averaged
"As I’ve said before now, so what if CF is ‘pregnant with stock’ during the Xmas period?" - it means we have spent a tonne of cash on stock. NWC is the opposite to your cash. And if you expect big trading (Card stores do around Christmas) then you take your cash and you turn it into stock which you hope to sell for more cash. So given Christmas means a tonne of new and specialist lines the business will be using a huge chunk of cash to buy stock. So NWC will be higher and cash will be lower. If the bank want a big payment in Nov or Dec it's likely Card won't have cash on hand unless the bank wants paying with Christmas cards
CFO - It should be noted that net debt at the half and full year period ends is lower than intra-year peaks, reflecting usual trading patterns and working capital movements
"hence why I used averaging, as that at least gives us an idea of how much cash we need to find, albeit it doesn’t tell us when we’ll need any of that cash" - exactly you can't average it doesn't work for a seasonal business!
"How and when we raise cash is irrelevant to me." - this is t
Revenue for H1, 6 months ended 31 July 2019 195.6m
Revenue for 12m ended 31 Jan 2020 451.5m
Revenue for H2, 6m to 31 Jan 20 is therefore 255.9m (30.8% higher than H1)
* Not used 2021 data given COVID impact
That might help you in your weighting your cash flow estimates
I’m a simpleton and have made an absolute fortune in the last 12 months on simple research and gut instinct.
In this case you only have to sit outside the Card Factory shops to see they are actually really busy.
The demand is there so the gamble here is whether or not there will be another lockdown.
I don’t think that there is a cat in hells chance of the shops closing again - ever.
Card Factory was a really successful viable business before all this Covid nonsense and will be afterwards.
£1+ easily in the next 6 to 12 months easily.
Only in my opinion of course.
Dan,
According to the annual report, receivables currently stand at £9.2m, which is 13% of the £70m. Of course, it’s not that simple, because we also have outgoing receivables, but sure, why bother with actual numbers when we can just settle for ‘very low’. My original point was that I used averaging, because there are so many unknowns in the equation, and if you start using incorrect numbers in calculations that involve millions of pounds, the compounding effect can often leave you with numbers that are significantly more misleading than if you simply used averaging. Next time however, I will just put ‘very low’ into my calculator and then I’m sure I’ll know exactly how much money we need to find each month and where it’s going to come from. For all you know, we could have a new deal lined up with a large retailer or two. Wouldn’t that increase revenue? We simply don’t know enough to make exact projections.
When did I say that the business would be ‘full of cash’? I expect the business to be cash flow positive in those months, yes, but I can’t recall stating that we’d be ‘full of cash’. As I’ve said before now, so what if CF is ‘pregnant with stock’ during the Xmas period? Does that mean that we’re 100% going to have a £70m RI? I’ve used averaging, because neither of us know how ‘pregnant’ CF will be at the period, nor do we know countless others things about the business... hence why I used averaging, as that at least gives us an idea of how much cash we need to find, albeit it doesn’t tell us when we’ll need any of that cash, but as you’ve admitted, you don’t know that either. How and when we raise cash is irrelevant to me. What I care about is knowing that the business is going to survive and then thrive, and I’m very confident about that. I couldn’t care less about the details at present, and I’ll care even less when this multibags for me again.
If the bank want £40m over such a short period of time, we’ll raise funds, one way or another. So what?
"For instance, do we know when our receivables are due?" - sorry buddy you really don't get this business do you?
So in a store a person walks in and buys a card and they pay cash or by card. The stock goes straight into cash. There is no receivable. Card has a very low receivable balance which will relate to partnerships or maybe some corporate sales
The point your averaging gives you is that somehow the business is full of cash in November/ December when its likely the opposite as the business will be pregnant with stock ready for the busiest trading period of the year (you might not be aware but Christmas is key for a card retailer)
"If 40% of our revenue is made around Christmas, why would we struggle to buy stock for Valentine’s Day? That makes no sense whatsoever." - i'm not saying we would struggle to buy stock for Valentines but my point is that we don't know the amount of debt repayment up to this point. So yes Card might generate a lot of cash over Christmas ready for Valentines but if the bank want £40m over Nov to Feb then that will take a huge chunk over of business which generates c.£80m of FCF so again won't be easy while also considering gearing which the business needs to reduce to attract more investors
It's not guess work! You can't just assume a business makes all it's money equally across a year and then also that the cash comes in equally. This is a VERY seasonal business. As I said Paperchase made 40% of its profit in December so Card is likely the same yet you're putting it all equal waited? You're the one guessing and it's leading you to make very incorrect assumptions
Cheers Dan,
I didn’t know that businesses worked in such a mysterious way. I used net income in my initial calculation to make an allowance for that as well. It’s impossible to give a detailed forecast when we don’t have access to the information required. For instance, do we know when our receivables are due? Isn’t that an important factor when considering working capital? In my calculations, I’ve used averaging, because I accept that I don’t know the full details, whereas you seem to think it is more appropriate to take a complete guess and then treat your guess as fact. I prefer to take an average, and hedge my bets. If we don’t raise any equity, I don’t mind, because I’m a long-term investor. If we raise £70m, then I will buy more shares on the places. If CF issue bonds, then I will purchase the bonds. As I’m prepared for any eventuality, what is the point in splitting hairs?
Ok then, let’s assume that we don’t save £1 until December. In this hypothetical situation, we could simply raise, say, £20m in the form of issuing bonds or an RI, then we’d be in the clear. If 40% of our revenue is made around Christmas, why would we struggle to buy stock for Valentine’s Day? That makes no sense whatsoever.
They might very well make much less FCF than I’ve estimated, but as I’ve said, I don’t really see that as an major issue.
I see the benefits in a £70m raise for sure, but we don’t know if that is coming or not. I would have thought that CF would have announced a raise when the share price was above 90p though, rather than implying that a £70m RI could be coming, when that was obviously going to result in a sell off. Where is the sense in that?
Because of working capital. It’s how businesses work. There was a article on paperchase that 40% of revenue was into Christmas so if Card is similar than up to Nov most of the spare cash alongside the capex for ERP and other IT items will likely mean we aren’t putting cash away in the months up to Nov.
As Card is a cash business then successful trading will mean NWC will turn back to cash quickly but this will be January before it normalises. But then in January the business will be buying for Valentines so again drawing cash into NWC
You can see this in the Card business as the final dividend (when a business typically forecasts peak excess cash) is June
So the honest answer is due to working capital and investment the FCF will unlikely be as you say when these payments start ie of there’s a payment in Nov, Dec, Jan or Feb then cash might be better being in the business
Come March you’d be right and we will be flush (trading all well)
My view is that £70m will be raised. As it’s all needed? No but because it brings the balance sheet down to 1x net debt to EBITDA. This will allow more investors to add Card as the balance sheet has acceptable gearing
There is some good narrative in the going concern note that says the business is forecast to survive on crap trading and I assume no equity raise (as that’s not guaranteed)
Dan, why can't I use averaging for the purpose of estimating how much money CF will likely need to raise in order to make the repayments? If Christmas was due 9 months after the first instalment, then I'd understand your apprehension, but we're likely talking about 2 payments before we're in a solid financial situation due to Xmas earnings. Surely we banked a few quid thanks to Father's Day as well? Imo, should we need to raise capital before then, we can issue bonds or raise equity via a RI (I can't think of a scenario where more than £15m-£20m would need to be raised, so I'm not losing any sleep over this).
While the additional stock will cost us in November, we'll also see an increase in net income that month, which we could put towards the December repayment (if the repayments are monthly).
I can't say it reads like that to me and I don't think Darcy will entertain the idea of wasting £5m on a fine. Honestly now, if CF pay that £5m fine, I'll immediately liquidate my holding as I'll be of the belief that the company is being ran by idiots of the highest calibre. My understanding is that the recent refinancing (the increased RCF, I imagine) will cover the Capex, so we can do both. How much do you think we need to raise?
Sorry Lorenzo. You can’t just use an average when a business is very seasonal. If anything the business will likely be very pregnant with working capital in November as it readies it’s stock and stores for Christmas. It would be better to work on the assumption that given no large events and then ready for Christmas the business will likely see cash outflow up to November and no income as you have predicted using an average (hence why you don’t do this)
The point re capex is correct but the point being that we can’t do both ie pay the loans and capex without incurring the fine. The board might just decide “let’s pay the fine” and then go all out on the facility but they have also said they want to delverage so therefore the equity raise is needed
Dan,
I had to use an average monthly net income for ease of calculation and I believe it was sufficient to do so as Christmas is only 1 month after the first repayment is due. In terms of the Capex you've mentioned, Darcy stated that 'the recent successful refinancing provides the business with the necessary financial resources to focus on our future growth strategy' in the latest preliminary report. That sounds to me as if we've got that covered for now, but I completely agree with your point regarding the importance of us continuing to invest in future growth. A careful balance needs be struck for sure, and I'd also rather a small RI than us waste £5m on what would essentially be a fine or us neglect the growth strategy. The priority however, has to be sorting out that balance sheet imo, and I think we can probably do this by issuing bonds. If not, a small RI would likely be suffice. Thank you for your reply, because I wasn't giving enough thought to the financing of growth strategy tbh
Roxbury,
The director buy also speaks volumes to me, but it comes as no surprise at all. While the assumptions made by many of us are often based on 'very little', they allow us to put things into context and they help us estimate the level of risk. Without assumptions, business plans, mortgages, property valuation, insurance, money and economics etc wouldn't exist
£708.19k Bought
£203.18k Sold
I know this information is available for all above so I am telling you nothing new but it’s important to grasp that this is everyday.
This can’t be held back for much longer.
Over 800,000 more shares bought than sold.
At the end of the day we can all make as many assumptions as we like and that is good because this is a discussion board and it’s nice to see other people’s thoughts but truthfully they are all based on very little.
The Director buy speaks volumes to me and so does the fact the shops are actually busy which nobody can’t deny and it’s not my opinion it’s a fact.
On closer inspection some of those balloons I mentioned on an earlier post are actually £15 and people are actually buying them!
If we go back into lockdowns then we are in trouble but if not then we will double for sure.
Two of those £10grand buys earlier today were mine because I’m a believer.
The future is bright the future is The Card Factory ha ha
@lorenzo also you're assumption is based on linear trading. This isn't the case the business is weighted strongly towards Christmas. Between now and then there will be cpaex spend on online and the ERP system so unlikely the business is producing high amounts of cash atm
For me this becomes a trade off between growth and setting up for the longer terms vs dilution and paying off debt
The worse case for me is that the business doesn't raise and runs itself silly purely to pay back the banks. In that scenario as equity holders the equity is in effect worthless as we don't get any returns we just exist to serve the banks. Card also can't out the correct resources into online and partnerships and ultimately the business dies
The best scenario is that we raise (hopefully in Sep after a good trading update) and then the bank issue is gone and cash can then go solely to growth
I agree I'd like to see bonds rather than equity but I think equity will be the route or at least part of the mix
LatPullDown,
Was in the process of writing the below when Dan posted his message:
According to the May trading update, we have until July 2022 to repay the £70m, but we have to start making payments from November 2021. However, they haven’t revealed how frequent the instalments will need to be paid or how much each instalment will be, to my knowledge. As it’s a 9 month period, I’ve made the assumption that we’ll need to repay just shy of £7.8m per month. That said, as we likely started putting cash aside for the repayments in May, we can divide the £70m by 15 months instead, which gives us a total of £4.67m to find per calendar month, if we want to avoid the £5m penalty. The million $ questioned imo, is how much of the £4.67m we can obtain through our trading profits. Personally, I think we’ll be able to put aside upwards of £3.5m per month, albeit I am being conservative, but with the way the world is atm, it’s guesswork, to an extent. £3.5m x 15 months = £52.5m, leaving a shortfall of £17.5m. If I was CEO, I’d be looking at issuing bonds, as that would allow us to raise that c.£17.5m without a dilution to shareholders. With a healthier balance sheet, improved earnings at the time of issuance and a decent ROI on offer, surely the bonds would be snapped up in no time at all
This is the course of action I’d look to take anyway and Darcy’s purchase suggests to me he’d also like to swerve an RI
@lat that's not right. They have to start paying back amounts in an agreed timetable from Nov-21 to Jul-22 or suffer a £5m penalty
If trading is amazing and management wanted to avoid dilution they could take the view that pay £5m and keep going as we are. £5m would in effect be a very expensive interest cost
It also shows how £70m might not be £70m if trading is better but in my view the raise (or refinance) comes before November as then revenue from Christmas can be put into growth
They have until November I believe to square the books and most of that will be to pay back any CICF Government loan funding.
Freedom day should lead to capacity restrictions in shops being lifted.
Darcy probably had an inkling it was coming hence the buy in.
Any potential rights issue previously announced is already priced in. This could still add 20 - 40p this year.
Nice rebound starting.
Forget predicting this one as it's all over the place.
When it has such unpredictability you just angle on buying when its low and sit and hold.
£535.13k Bought.
£292.34k Sell.
Almost twice as many buys as sells again. Patience is the name of the game here.
A 7% rise today so hardly the makings of a firm going under. This period around 60p was an excellent top up or buy in opportunity as we know in a few years time this will be £1.80 a share.