The latest Investing Matters Podcast episode featuring financial educator and author Jared Dillian has been released. Listen here.
Here is a link to an article on the front page of the business section of The (UK) Times today, “Growth at a ‘turning point’ as economy gains momentum”.
https://www.thetimes.co.uk/article/289cd3d9-9591-4638-911b-2adbb0c7b70c?shareToken=1845c0b7c76e627bab3496e88a457567
Clearly VCP has suffered over the last 18 months or so from the large drop in flooring demand, just like Headlam, Tarkett, Mohawk, Forbo, etc.
However, cyclical businesses are cyclical, and all the leading indicators for a demand recovery - mortgage approvals, house prices, housing transactions - are showing big gains in VCP’s major markets - UK, USA, and Australia - since early 2024.
Only Europe is still subdued, but that may change in the near future as inflation is now just 2.4%, which suggests the European Central Bank is likely to follow the other central banks and begin to cut interest rates mid-year.
With that outlook the downside risk is very low and the upside potential significant. A demand recovery is probably only months away, and when it comes VCP’s earnings and share price will move up sharply.
Well, the bonds traded up after the publication of the new rating so clearly it wasn’t a surprise and the market wasn’t concerned about it. Virtually every company in the sector has experienced ratings’ downgrades, and some double-downgrades, due to the macroeconomic environment.
More sensationalist tabloid trash, this time an article in The Times today.
Contrary to the headline which suggested that Victoria’s board was expected to be “carpeted” at the General Meeting today, 97% of shareholders voted in favour of the two resolutions, accepting the annual accounts, and reappointing the auditors.
Last week’s FT article about Qasim Karim is tabloid trash.
The story focuses on the criminal activities 13 years ago of the younger brother of two of Victoria’s managers. Not the Victoria managers themselves, but their younger brother, who has never worked for Victoria.
The two older brothers, Batash and Saqib, are successfully managing two of Victoria’s smaller subsidiaries, Hanover and Ezi Floor, which together account for around 2% of Victoria’s group revenue.
Qasim’s quoted comment that Victoria also tried to acquire his paints, varnishes and sealants business 12 months ago is delusional nonsense. Victoria is not in the business of paints, varnishes and sealants.
It is interesting that The FT turned off the comments on the Qasim Karim article, and interesting that shorters loaded up the day before the article was published.
You have to wonder who is motivating whom to publish such sensationalist tabloid rubbish.
What the article does inadvertently do is destroy one of the theories propagated by the shorters, that Hanover and Ezi Floor were not acquisitions at all but elaborate accounting frauds, which the investigative journalist who wrote this article has clearly shown is not the case.
The criminal activities of younger brother Qasim Karim 13 years ago are of no relevance whatsoever to the future prospects of Victoria PLC. The market has clearly recognised this with the share price having gone up 25% in the week since the article was published.
The shorters lost money last time they manipulated the share price down with their baseless rumours and trolls, and they’re going to lose money again this time.
This morning’s RNS confirms that Grant Thornton are being reappointed as the group’s auditors, contrary to the recent short-seller claims that they had resigned or had refused to be reappointed. Yet another irrefutable example of the malicious misinformation the short sellers spread in an attempt to manipulate the share price.
Grant Thornton would not have agreed to continue as auditors if the accounting issues identified in the audit report were serious or endemic.
Rating agency Fitch has reviewed Victoria PLC’s financials and market dynamics, including non-public information, and “has affirmed Victoria PLC's Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook and Victoria's senior secured notes at 'BB+'”
“The rating balances Victoria's high leverage with the group's good diversification and strong market position. Victoria's exposure towards higher-end customers supports its ability to pass on incremental costs without a major impact on their volumes in a recessionary environment.”
“The Stable Outlook reflects the group's strong ability to integrate its new acquisitions, resulting in incremental EBITDA across the rating horizon to 2026.”
Fitch is one of the top three ratings agencies in the world and has undergone rigorous analysis of Victoria to arrive at its Stable Outlook rating.
Who are we going to believe, the monotonously repetitive commentary of self-interested short sellers, or the considered analysis of impartial professionals like Fitch, Peel Hunt, Berenberg, and Singer?”
The irrational hysteria in these chat rooms and even in the mainstream media around accounting issues relating to £400K of revenue has resulted in a share price which represents an EBITDA multiple for the Group of only 7x (taking into account £658m of Debt, £238m of Preference Shares, £600m of Market Cap and expected 2023/24 EBITDA of £214m) which is very low for a company with Revenues of £1.5B and a portfolio of businesses spread across the UK, Spain, Italy, The Netherlands, Belgium, Turkey and Australia.
By way of comparison, the single Spanish ceramic tiles producer Baldocer, with revenues of around €200m, sold last week for €425m plus an Earn Out arrangement, representing an EBITDA multiple of around 10x.
At 10x EBITDA Victoria’s share price would be over £10.
As is often the case, the market has way over-reacted to a bit of bad news which is obviously in fact quite immaterial, creating a great buying opportunity for more savvy investors.
The company has provided a full statement regarding the audit issues. In summary;
The issues apply only to one very small subsidiary (Hanover), which represents “less than 1.25% of total group revenue”, and less than £400K of payments that were applied to Hanover customer accounts could not be properly reconciled to original invoices. In other words, the issue is quite immaterial and doesn’t change the underlying value of the group whatsoever, despite the shorts’ desperate attempt to make it sound like it does.
“There is no wrong-doing at Hanover and nor are the auditors alleging this”.
The company has “identified the issue, allocated additional finance resources, and is putting appropriate controls in place and the issue is not ongoing.”
The scope of the audit was limited by the company because it became obvious that the auditors were not going to get to the bottom of the immaterial issue they were digging into in time to meet the company’s statutory obligation of publishing the audit report by the end of September, six months after the balance date, which could have been a more significant problem.
It is interesting to note that the same shorts have in the past made a huge fuss about the shorts driven “Iceberg Report”, which ridiculously claimed in another desperate attempt to discredit the company that Hanover didn’t even exist as an acquisition. The auditors have clearly had Hanover under the microscope for months, and have concluded that a very small percentage of its revenue cannot be properly reconciled to individual invoices, clearly confirming that Hanover does exist. The shorts that were previously urging that the shares were over-valued because Hanover doesn’t exist are now urging that the shares are over-valued because a very small percentage of Hanover’s revenue cannot be reconciled.
The cash went down by £170m because the company spent £210m on acquisitions.
The Underlying EBITDA of £196m and the Underlying Net Profit Before Tax of £76.9m are simply the earnings made by the company after excluding restructuring and other one-off costs.
Underlying Earnings are always carefully reviewed by the auditors, so they are ‘real’.
Balta’s restructuring costs of £90m, which obviously won’t be repeated, for example, are technically an expense under IFRS, but are in fact an investment in future increased profitability, and as such should be viewed as a capital investment, just like an acquisition.
Sophisticated investors and analysts like Peel Hunt clearly understand this obvious point, which is why the shares went up, and not down, when the final results were announced, and why Peel Hunt has set a target price of £8.
Strong positive response from the market this morning.
The market clearly likes the clear earnings and cashflow growth outlook for the company, driving down debt.
Great to see the audited financials are exactly as indicated last month.
Also good to see EBIT numbers by division added alongside EBITDA. Gives a good idea of the earnings potential now that the integration has been completed.
I particularly like that the average organic growth will add £25 million a year to net profit.
If you look at the published H1 numbers for FY23, Turkey has been doing pretty well for VCP.
Again, the advantage of proper analysis.
Victoria bought a modern ceramics factory in Turkey (not India) last year and is integrating it to lower production costs.
I’ll stick with proper analysis and legally regulated announcements rather than “the word on the street”.
No Alfista, that is total nonsense.
Several large, sophisticated investors have conducted extensive due diligence on the company this year, and have subsequently decided to invest.
Only yesterday Victoria confirmed earnings were on track to meet market expectations of £214 million Ebitda for FY24.
This morning, Victoria confirmed its FY23 results, to be announced 15 August, are in line with market expectations, and trading for the June quarter was also solid, with stable demand, improving margins, and integration projects on track.
James Halstead also announced this morning that their expectations for the full year ending remain unchanged and they are seeing similar market conditions to Victoria.
It’s good to know that sophisticated investors who have undertaken very detailed analysis, like Koch, Orbis, Spruce House, Vulcan and, most recently, Morgan Stanley, have clearly concluded that the shares are increasingly valuable.
And now I see that Morgan Stanley have confirmed they have bought 5% of VCP.
It’s very positive to have such high quality investors interested in VCP.
VCP’s recent share price increase is underpinned by recent solid macro economic improvements, which is no doubt why the shorts are bailing out now, and why the price is likely to continue recovering.
Falling UK inflation, confirmed yesterday, has led to a devaluation of the pound, which increases Victoria’s earnings (75% of the company’s profits are made in euros and dollars).
Falling inflation in both the UK and the US, will result in interest rate decreases, which will increase consumer discretionary spending.
Falling energy and raw material prices from last year will improve margins.
So, in summary, the outlook is for higher revenue, higher margins, and higher earnings.
In The Times article on Saturday “Where in the world would you invest next”, Alex Cutler from Orbis Investments selected VCP out of only four recommendations in the UK.
Link:
https://www.thetimes.co.uk/article/where-in-the-world-should-you-invest-next-mxhvxg6z5