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The consequence of treating your suppliers badly.
I hope your new sofa works out for QE.
HoF concessions ended https://www.theguardian.com/business/2018/oct/25/house-of-fraser-scs-to-close-all-concessions-furniture-flooring
I'm going to give you a whirl as last two burgundy leather sofas from your competitors have lost colour very quickly and leather doctor very expensive and Andrew Muirhead a bit out of my league at the moment. Good luck
https://www.chroniclelive.co.uk/business/business-news/scs-talks-mike-ashleys-house-15226885
Good luck with the talks though it might be difficult to find anybody to talk to at the moment. I am slightly curious to know if it was one of your sofas the shopper paid for and marched into the HoF after the collapse with her family and a van outside with the police saying it was a civil matter. Maybe your results would have been even better if your concessions had been in a different dept store. You are definitely on the radar now but the ship has set sail without me I think. Will definitely watch how you go in the near future.
Confident and pleasing results with divi ahead of expectations and current year trading continue to show growth.
Increase in earnings was supported by 0.8m lower marketing cost, with higher gross margin from improved sales offset by higher admin personnel costs. With the collapse of several competitors it makes sense to rethink marketing spend and we may see a further reduction this year with the impending increase in business rates.
Juicy 8% dividend yield which looks pretty sustainable going forward, they have managed to maintain and increase it through this point in the cycle. Cash balance looks very healthy as always.
HoF not doing well as expected but no mention of one off impact that I could see from my relatively brief scan.
Based on 2019 net income SCS trades on 9x and DFS on 12x. This gap narrows substantially the following year reflecting DFS revenue growth while SCS has low single digit growth.
Fair enough, pleas not that DFS trades at a ttm P/E multiple of 14.3 while SCS trades at a ttm P/E multiple of 7.6. On top of that (as we discussed) SCS has a huge 51M GBP net cash position while DFS has around 140 of net debt (I used the LSE website for the DFS data). It appears we agree that at least 15M of SCS’s cash are access cash and therefore the actual P/E ratio is lower.
To clarify, by working capital deficit I mean negative trade working capital: debtors + inventory - payables. Its not very common.
I agree with the value proposition you outline. Its not an exciting company but it pays a sector/market leading dividend on a low net asset base which i see as relatively low risk. It only only trades at a small discount to DFS (on a P/E basis) despite being a much smaller company.
Hopefully results in a couple of weeks reveal low single digit growth in profits. which will be a resilient result in the current retail climate.
Hi Ragnar, I think we can bring this chat to life, there is no working capital deficit, current assets are 85 (I’m rounding numbers, all figures in million GBP) and current liabilities are 72 so that’s a 13 surplus. If you are referring to operating working capital currently it’s about Minos 45 but that’s the business model, negative operating working capital as the suppliers finance operations (In what is essentially a zero-interest rate loan).
Here are two thoughts for you:
1. There is a float like feature to the business, theoretically, if sales continue at the same rate (no growth is needed) you can extract the 51 million, disburse it to the shareholders via buyback or dividend and continue operations, you will get the cash necessary to operate from the new customers and as long as sales maintain current levels this can continue, this is off course to illustrate a point. obviously a certain level of cash is needed in the business and it is not prudent to assume sales will never decline.
2. Book value is law because they don’t need a lot of capital in this business model, in fact since 2014 they paid shareholders 23.5m GBP, that’s close to the current book value.
So let’s assume we agree that 15M is access cash and SCS pays that to shareholders, you find yourself with 13M of equity producing 9M of earnings and an ROE close to 70%...
what I’m saying is basically ROE is less relevant in this case.
I personally believe that 30%-40% of cash is access cash and if you deduct that from market cap you will find out SCS is trading at an undemanding P/E OF 7+, if management will be able to deliver profitable growth in the coming years, as they have said (opening 20 new locations in the next 5 years) then this is absurdly cheap. I also think that from a free cash flow perspective they produce more then earnings and you can expect 12-14M GBP of FCF a year that means an FCF multiple of 5+ again cheap.
There is a huge working capital deficit which is the result of the lag between SCS taking on customer deposits and purchasing the stock from suppliers. I would say that surplus cash is closer to £15m, which is the cash balance less the working capital deficit.
Its quite a unique, asset light business model which yields an incredibly high return on equity - net assets of £28m compared to full year NPAT of £9.4 gives ROE around 33% but it trades at substantial premium to NTA.
Fair points Ragnar, let’s say you can take out around 13M of access cash, that number is basically current assets minus current liabilities. That’s 0.32 GBP per share.
and let’s assume such a business “should” get an EV/EBITDA multiple of 5-6, I would say that it is relatively conservative and un-demanding.
you get a “fair value” range of 2.85-3.35 GBP per share.
as for the Hof point, I completely agree.
The company is indeed highly cash generative even in an extremely competitive retail environment. The business has a solid history of carefully rolling out new stores in well planned locations and thoughtfully reinvesting profits into marketing expenditure.
Don't forget that a big chunk of that cash balance relates to customer deposits and will be required for inventory purchases and working capital funding. There is a healthy surplus cash balance but its much less than £50m.
I think the shares may have been held back recently by the administration and sale of HoF. While the low receivables balance suggest minimal one off impact, the stores contribute 7% of sales (from memory) which could take off £1m in annual profits if the concessionaire arrangement doesn't continue with Mike Ashley in charge. Some clarity around this will help, although results are due on October 2nd so maybe we get more info then.
SCS is cheap, with a market cap of 85 and 51 net cash on the balance sheet, SCS can easily produce 12-14 Million of FCF a year without any heroic growth assumptions (In 2017 we saw 24 Million of FCF). At this rate, if market price remains the same, in 3 years the company will have 72 Million on the balance sheet, and that’s after paying investors 15-18 million in dividends…that not bad for an 85m company.
market price seems far from intrinsic value and priced for a very gloomy future.
Fabb Sofas, the upholstery retailer founded by Lord Kirkham, has been placed in administration after failing to find a buyer. Analysts at Peel Hunt, the broker, said last night: �Many saw Fabb as a possible disruptor, so this is clearly good news for the likes of DFS�.
Happy with this result considering what is happening in the UK retail sector. The div yield and cash balance helps to limit the downside (Net of advanced payments, cash is �26m) while the deeply negative working capital position is a strength of the business model and limits the need for debt. Interesting to see if their lower marketing spend is a continuing trend to lower costs. A reliable 7%+ dividend yield growing by 5% on average per year is a nice counterbalance to some of the riskier elements of my portfolio. May add some more in the new tax year as well.
Dont TRUST this individual in any way - this is a recent post on another BB : Look at my historical BB�s and the gains made, look at Jiddy the boy clown prince of fools. I did call 88e at about 0.4p. based upon the near 6 billion shares in issue, continual dilution, its shut from fracking 6 months of the year and in a most expensive area to produce oil of which it does not. Its a classic value trap at most and will likely crash or increase dilution to raise more funds again soon as it runs out of funds again. Still it keeps the Directors in a job. Its ramped daily by sad old bunch of which Jiddy is a key player. I only hope he adds to his 88e holdings
Numbers are very sound, looks like they are gaining market share from Headlam Gp and Carpetright on th overlap products and definitely the best medium term investment out of the three
Although Scs group has been satisfying shareholders. There is another company that is in a less competitive space but relates to floorcovering or the distribution of floorcovering. It�s Headlam Group. It pays a progressive dividend, has stable earnings and the share price recovers faster than those in the floorcovering industry. Also, the business model is simply lorries, warehouses and drivers. For further details on Headlam, click http://bit.ly/2mLZyHa
I suspect a mixture of profit taking and fear that it's been a bad Christmas trading period - a lot of retailers are getting hammered today and it could just be a fearful read across.
Whats with the sudden drop the last two days?
Good to see this stock has started to tick up to a more realistic price. It seems to be rising in spite of the negative sentiment around DFS and CPR recently. Still trading at a ridiculously low multiple.
Good to see others here. The share price is hilariously low. This is one of the few shares with only UK exposure that I'm happy to hold considering Brexit risk - it's just too cheap to be of a concern even if things go a bit south.
Market Cap of £70m. Net cash of £40m. Makes £17.4m EBITDA. Massively oversimplifying things here, but you could look at that as a multiple of less than 2x EBITDA. That coupled with the c8% dividend yield makes me think these shares are hugely undervalued. Price target of 215p feels very low to me. DYOR.
SCS Group PLC (LON:SCS) had its price objective decreased by equities researchers at FinnCap from GBX 230 ($3.05) to GBX 215 ($2.85) in a research report issued to clients and investors on Tuesday. The brokerage presently has a “buy” rating on the stock. FinnCap’s price objective points to a potential upside of 34.90% from the stock’s previous close.
Back in the black now, but still very cheap. Sit and hold :)
at the moment. Glad I didn't add. Happy to sit on this and collect the divi. If they ever have a blow out earnings or if volume picks up, this will start to move significantly IMO. Might take a while though.