A few comments14 Jan 2022 16:19
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.
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