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We are waiting on the following:
- Convex: Further deal closures are needed from Convex this side of the year otherwise RBGP will likely miss the £10-£12m EBITDA guidance. Translation: another profit warning could be coming.
- Debt refinancing: CEO and CFO have always maintained RBGP has a great relationship with its bank, HSBC. Why have we not seen an extension to the loan as yet? If RBGP are looking at an alternative provider, why is this? Has HSBC requested an equity raise to help delever the business?
That's fair. I guess when I look at companies I like to see management with reasonable skin in the game to help align interests. The CFO earned over £400k last year so owning shares worth 10-20% of her total pay isn't unreasonable in my view. But I understand your point.
CFO bought 20,000 shares at 33.4171p and now holds 29,950 shares. She spent a dizzying £6,683 on Watkin Jones shares. If that isn't a signal I'm not sure what is! Avoid this until they officially cut the dividend and then re-visit.
I took a look at Strix at IPO as Simon Thompson wrote about them. Looking back from 2014 to now, the business seems to be able to generate £20m per annum excluding the Billi acquisition which probably adds another £5m. That means £25m net income or ~7x net income. I would expect Strix to reduce the dividend, ideally cut it and repay debt. I guess the key risk in my mind is the two largest customers account for about 30% of sales and I am guessing they have been impacted by these Covid lockdowns in China. I have taken a small position at 78p and would look to add if they issue a third profit warning along with a dividend cut.
Exactly Hexam. That’s my point. Even with pre-Covid starting point, the cash flow generation isn’t amazing especially when compared to the market cap of £185m. Roughly 10%. They reported EBITDA £71-77m under IFRS 16, the comparative figure pre-Covid is around £124m. Do we really think Valentines and Mother’s Day will account for the difference or has there been loss in market share to other players? My guess is the latter. If so, perhaps our starting point is EBITDA of £100-110m. Taking off the deductions mentioned below means we are sitting on a breakeven business while we wait for either the inflationary effects to go away, price increases to be passed through or revenue growth from the IT spend. Very different to the £50m free cash business I initially thought this was.
lsetown: https://www.cardfactoryinvestors.com/sites/cardfactory/files/NewPDF/CardFactory_36220_AR2021_WEB.pdf
Page 123.
Net cash flow from operations: £110.2m
Minus capex: £14.5m
Minus interest: £8m
Minus lease payments: £41m
Minus expansionary capex and inflation £30m
Cash for debt payment: £16.5m
Thanks BanburyBoy. Please correct me if I am wrong but I don't think I have double deducted leases. If you do the calculation off the cash flow statement (p121 of the annual report), net cash flow from operations is £110m. Minus tax £14.6m, capex £14.5m, Interest £8m and Lease Liabilities £41m, that gives £16.5m for debt repayment.
I've re-read the Trading Statement and wanted to share some thoughts.
1. I was expecting Card management to prioritise debt repayments over deferred rents, potentially agreement a good discount from landlords. It seems they have done the opposite which probably means Card will only be able to repay about £30m of the £70m debt by the summer. How will the banks feel about this? They have already shown forbearance in the form of extending the loan at the same terms, will they extend again?
2. The £30m cost increase is significant. I appreciate a large chunk of this is likely to be expansionary capex to fund the IT spend. Is this is a one-off cost or recurring? What is the likely payoff from this investment? Card tells us they want to take revenues from £450m to £600m by 2026, how do they do this? If it's online, how do we know online won't be cannabalising their store estate, in which case there should be a plan for reducing the store footprint, much like Shoe Zone. If they are moving into gifting, this will likely be lower margin than cards as they are not vertically integrated when it comes to gifts.
3. Lets look at the numbers for 2022. If we assume Card recovers to pre-Covid profitability (i.e. 2020), the business will generate EBITDA of £126m. If we deduct leases (£41m), Capex (£14m), Interest (£8m), inflationary costs and expansionary capex (£30m) and Tax (£15m) that leaves £18m for repayment of debt and dividends. This means, it will take another two years to clear the remaining £40m outstanding to the banks.
4. Net debt of £60m looks too low. Business generated £33m of EBITDA. How did they reduce net debt from £96.5m to £60m while repaying the deferred rents considering there is some capex spend to be deducted from the EBITDA number too?
5. Has management hired an e-commerce expert or someone with experience of building out a business like Moonpig? If not, so we trust existing management who don't have tech experience to build out an online competitor?
6. Considering all of the above, I think management has communicated badly with the market. They have failed to tell a compelling story which should meant a higher share price and a transition to part online. Instead we have a management team that has tanked the share price, will need to renegotiate with the banks, investing in IT with no experience from what I can see and will ultimately try to raise equity capital in the summer in my view. Management will raise £40-50m and show this as "outperformance" versus the original £70m. There is potential for an investment story here but I think it will be a long turnaround (no dividend until 2025 at least) and hence likely rangebound in terms of stock price until then.
Lombard Odier Boosts Short Position in Card Factory to 1.40%
Lombard Odier Asset Management increased its net short position in Card Factory PLC by 6.87% to 4.79 million shares, or 1.40% of the company's stock as of Jan. 4, 2022.
Lombard Odier has disclosed the only short position in West Yorkshire, Britain-based Card Factory, according to regulatory disclosures
Problem with your analysis is you don’t explain why sales will fall 50%. The greeting card market is not going to decline 50% unless you think there is a major shift in consumer card giving behaviour. I don’t think people will stop sending birthday cards or Christmas cards. Moonpig caters to a different customer base at a different price point and is more focused on gifting. Supermarkets can take some market share if they aggressively target the space but they don’t do balloons or offer cards in all stores. Card will come under pressure from wage inflation but so will others. They are the lowest cost producers as they are vertically integrated so will likely be able to pass on some cost increases. There are also likely to be reductions in rent as leases come due which will help absorb some of the costs you mention.
All the above gives no credit whatsoever to management and their strategic plan. I’m not hanging my hat on any growth in the business and see that as “free upside”. I’m always open to hearing the bear thesis on any investment to sense check my buy but your analysis has little substance as you have described.
Perhaps you can elaborate on why CF will see sales fall 50%. Who takes their market share?
Comparing Card Factory and The Works pre-Covid trading. Assumption is both return to pre-Covid levels in terms of profitability in 2022. Not factoring in any growth in revenues.
The Works: 2019 dividend was 3.6p, share price is 51p. 7% dividend yield.
Card paid ordinary dividend of 9.3p and special 5p in 2019, versus stock price of 59p. Implied 15.7%-24% yield depending on whether you include the special.
Assuming Xmas trading has been strong for Card, that should eliminate the fear of a capital raise.
Pricing Card to an implied 7% dividend yield puts the share price at 132p-204p with the top end including the special dividend.
Very hard to find investment opportunities where there is such a disconnect between the underlying value of the business and what the market is valuing it at.
Great post RoxburyHouse. I have enjoyed following your comments on this board over the last few months. It’s great to have genuine and thoughtful investors sharing their views.
I read somewhere that Card tried to market a subordinated loan to investors in November which has stuck in my head. Perhaps they are trying to accelerate dividend payments though I’m guessing the subordinated loan may have restrictions on dividend payments too.
Not sure I fully understand why the Board tried to market that loan unless of course they were testing the market to see if they could secure great terms like Premier Foods did in the summer (refinancing from 6.25% to 3.5%).
In any case, I think the key risk on Card was a lockdown over Xmas which didn’t happen. I think £1 in the New Year seems like a logical outcome here with Lombard chasing the market higher.
Reporting on two site visits.
Loughton: Steady stream of customers in the shop (weekend before Xmas)
Ilford: Visited on 24th Dec at 1600 and still busy. Looked like shop has been stripped bare in a few places, clearly business has been brisk.
I will be keen to see if management try to raise a subordinated loan, post Xmas trading they may be able to achieve a better interest rate than what they were probably being offered. If they do try to raise debt financing, it does tell us the banks would like to de-risk themselves. If that is the case, perhaps management could explore a convertible bond. The coupon will be lower than a subordinated loan (private credit funds will likely look for high single digit yield at least) and reduce dilution. The business clearly generates at least £50m in FCF per annum and repaying debt organically is both feasible and the best option for shareholders as long as there no further lockdowns during key trading periods.
Assuming no dilution, a return to £50m FCF, even at a 10% yield excluding leases and post repayment of debt, Card Factory should be worth £500m market cap or 2.5x the current value.
Mr Market is too pessimistic on Card Factory.
Carlyle has essentially extended a £125m loan and can convert it into 29.99% of Southend Airport. This mean they have valued the airport at £416m. Esken shareholders still own 70% of the airport hence £291m in value. The current market cap is £145m. If we add in the Energy business and the non-core assets, it's seems the market is pricing a dollar bill at less than 50c. Would think there is a path to 30p at least here based on the sum of the parts.
I would argue they don't even have to get to 70MM repayment by next summer. As long as they have made sufficient progress on debt repayment, i.e. north of £40m in my mind, I think they will be able to negotiate with the banks to extend the runway. I think dividend resumption will likely be in 2023 but with the business deleveraging the share price will rise in due course. At these levels, it's a bit like buying a bond for 30c whose face value is 100c. Patience is the key.