Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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
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?
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?
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?
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
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
Lovelace,
My theory:
In short, the sell-off was initially triggered by fears of a £70m RI (something that I believe would only be necessary if we weren't a profitable company), and as we haven't benefited from a significant positive catalyst since then, the momentum is against us. As the Prelim results were neither spectacular, nor woeful, I would suspect that while long-term holders like myself will have decided to hold (albeit some will have trimmed, so that they have funds available for an RI), traders will have put their money elsewhere, for now. The volatility of this stock implies to me that there is a ridiculously high level of interest here from traders, so I'm not surprised by the size of the dips we keep experiencing. I think it's important to remember that every large decline in CF's share price since March 2020 has eventually been followed by a serious rally... and that's without any major positive surprises in the RNS announcements; I expect things to be no different this time. Should we see 90p again within the next year or two, we'll have a 50% return on any shares that we buy at this level... That is absolutely insane imo. It couldn't be more blatant that this stock is currently oversold if you ask me
Lovelace,
A sweeping statement, yes, but certaintly an accurate one. I’m 28, and in that relatively short period of time, I’ve seen a huge change in society where the youth are concerned. Speak to anybody my age or older and ask them if the youth of today are anywhere near as friendly, outgoing or active as kids used to be. Parents used to have a hard time getting their kids out the house; nowadays the biggest issue for many parents is getting their children away from screens (phones, consoles, T.V. Etc). When I was a teenager, there would be at least 10-15 of us out every night Monday-Thursday, with at least 30 of us out on a Friday night. On Saturdays, I’d go into town and meet up with 100-200 people. Such a way of living is unheard of nowadays. You might be an exception, as I’m sure there are many, but my generalisation will apply to most of your generation. Btw, I also don’t understand the whole naming generations thing, and for the record, it isn’t just young people who are becoming more anti-social; it’s every demographic. Most people I know in construction start work at 07:30 and finish at 17:00-17:30, and many of them have to commute long distance. I usually have to travel for 60-90 mins each day to work, and then the same on the way back. Fortunately, I have some free time on weekends, but if I didn’t, I wouldn’t be able to buy from CF. As for young people being blamed for transmitting Covid by the media... who haven’t the media blamed? Young people for socialising, conspiracy theorists for questioning a ludicrous narrative, the govt for locking down too late, blacks, Asians and ‘anti-vaxxers’ for refusing to take an experimental vaccine (it’s only been approved for emergency use) that has no long-term adverse effect data (there is now suspicion that the spike protein in the MRNA jabs are harming people, and we now have over 1,000 vaccine deaths in the U.K. according to the govt’s own data), ‘anti-maskers’ for not wearing masks, the Chinese for their dietary choices etc. Who haven’t they blamed in their desperation for sales?
Mdunsire,
I buy all my cards in store for the reasons that you’ve mentioned, and I will continue to do so, but there is also demand for purchasing cards online, especially now that many people are reluctant to be within several metres of other human beings. CF’s bread and butter is high street sales, there’s no doubt about that, but I think we need to drastically improve our online performance. Our app and website have not prevented us from losing over a third of our revenue over the past financial year. That suggests to me that we need to increase our exposure online, so that if we do lose revenue due to lockdowns or the like, we weather the storm far better than we have this time around. I need to look at MP’s and FP’s result over the last FY to see if they managed to capitalise on our lost custom
Usernames,
I understand your concern there, but if done correctly, self-cannibalisation should be minimal; CARD’s market research has already demonstrated this. I think the online advertisements should be aimed at those:
• Who want to personalise their cards
• Who are willing to pay a premium for the convenience of buying cards online
• Those who work unsociable hours (in construction, for instance, it’s not unusual for people to work 6/7 days a week; setting off before CF open, and getting home after the stores have closed)
• Generation Z, as it’s difficult to get them out of the house for any reason, let alone getting them to buy cards from a store, as that would require them to actually speak to another human being face-to-face (a terrifying thought to many of them, it seems)
There is a huge opportunity selling cards online, and that’s because the demand is there. If we don’t capitalise on that, somebody else will. Personally, I don’t think MoonPig or FP have much moat at all. Those companies don’t offer anything that CF can’t offer. If many companies had the attitude of ‘if we start selling online, we’ll cannibalise our sales’, they’d have gone bust years ago, instead of thriving like they are today. Finding a balance is vital. If it is found, our biggest concern as CF holders will be capital gains tax :D
If you aren’t aware of the ongoing pandemic, lockdowns and previous Card Factory RNS releases.
Imo, the real weak point from the results was the online performance. Yes, the website saw huge growth, but for me, it wasn’t anywhere near enough given the present circumstances. However, in that lies the potential for a real turnaround. What I’m trying to say is that the online side of this business is still essentially at Ground Zero. I wouldn’t know that card factory had a website or app if I wasn’t a shareholder, and I’ve been shopping in their stores for several years now. Another key observation imo is that this company, at present, desperately needs the high streets to remain open. We as a society can not afford further lockdowns, and nor can this company; if we want to return to a comfortable level of profitability, that is
Fundamentals,
Thanks for your response. Possibly, but I personally wouldn't expect the banks to deliberately delay an RI; especially if they are concerned about the solvency of CF.
CVB123,
Good point. I often forget about those regulations.
I’ve seen lots of equity raises take place over the past year or so, but not once have I seen it alluded to in an RNS just days or weeks prior to a raise. Wouldn’t it have been far more prudent for the CEO to have announced a raise when the share price was flying? It doesn’t make any sense to cause a sell-off before announcing one at all. At the very least, there is no rush imo. On the contrary, If there is to be an equity raise, I expect it to be announced when we least expect it i.e. around the £1 per share mark. If the management team do wait until, say, Q2 next year, there should be a feel-good factor surrounding the company after so many months of profitability and a fruitful Xmas. This is what I’d do anyway. Also, it wouldn’t surprise me at all if a director purchase or two is made during this dip. Actually, I’ll be slightly concerned if none of them buy shares at these levels
I will be assessing the rest of the RNS in greater detail tonight
I went through the RNS several times last night and tbh, each time I went through it, the better I felt about the situation we’re in. I also valued the company in several different ways and arrived at roughly the same valuation each time. I won’t share what my valuation is, because I think it’s important that you each value it in a way that you deem appropriate. I’ve consequently bought shares in 3 tranches today and now I have exactly the same amount of shares I had before my panic-selling frenzy on Friday :D That said, I’m glad I did sell on Friday as I’ve been able to get back in at much lower than the 80p I sold at and it gave me time to really gather my thoughts and emotions. Anyway, let me break down my thoughts (this is rather similar to what somebody posted on here over the past few days, so apologies):
- £70m needs to be ‘pre-paid’ with the first payment due at the end of November... not tomorrow or next week... we have 6 months. We have 14 months to clear the £70m balance, which averages out at £5m per month. As we have 6 months to save up for the initial payments, we should meet the payments with ease until Q2 2022 at the earliest.
- Assuming that we don’t even have £1 spare in the bank and assuming that out net profit averages at a very conservative £3.5m per month, we’ll earn £49m over the 14 month period. That leaves a shortfall of £21m.
Conclusion: in a realistic worst case scenario, we could be looking at a c. £21m RI, bond issuance or the like. A drop in the share price like this over a potential £21m raise in a few months? If I was to hazard a guess, I think a lot of people have had their stop losses triggered today, whilst astrologers (‘technical analysts’, they call themselves) are following the momentum and others trim with the hope of buying in lower.
Each to their own. I’m really not fussed which way the share price goes here for the foreseeable future. I’m no expert on debt though, as I tend to invest in debt-free(ish) companies. Just my opinion on what I think is the most important aspect of the RNS
After trimming earlier, I reviewed the situation, had a discussion with my dad and then bought back 20% of the shares that I sold this morning. I paid 77p for those shares (after selling in two tranches just over 80p), so approx 12% of my portfolio is now in CARD. What made me change my mind? 2 things:
- The share price held up much better than I expected it to. As my dad pointed out, those who sold prior to the surge will not want to make the same mistake again, so we might start seeing stronger support in the share price.
- I treated the announcement as if a £70m raise was a certainty and tbh, I strongly dislike share dilutions, so I over-reacted. That said, as CARD will be profitable moving forward, one raise should sufficient to get the company's finances back on track and it will alleviate market fears over the balance sheet. As my dad pointed out, the issuance of bonds is another option. Either way, I still see a lot of upside left in this stock, providing that the management team do a half-decent job.
On another note, I saw a post from an investor on here earlier stating that they think that the management team should raise the prices of their cards... Just wanted to say that I couldn't agree more. Cards, balloons and wrapping paper etc are relatively price-inelastic goods, so we should take advantage of that. We could raise card prices by say, 10%-20%, and still offer far cheaper cards than the competition. I can't imagine many customers saying 'AN EXTRA 10P A CARD!?! THAT'S IT, I'VE HAD ENOUGH, I'M GOING TO START SPENDING SILLY MONEY ON CARDS FROM MOONPIG AND MY LOCAL SUPERMARKET'. I personally refuse to spend more than £1.50-£2 on a card (depending on who it's for), and even that's at a push! There's only one shop that always meets my criteria and that's CF. That's our moat imo
AndrewUkDealer,
Of course, a fall in sales in normal times would be a huge red flag, but these are far from normal times. It will take some time for the economy to recover and for people to feel comfortable leaving their homes to buy non-essential goods after many months of literally being under house arrest. My point was that I’m not concerned about the decline as I expected retail sales to be lower than they were 2 years ago... you know, prior to Covid. CARD are in the process of recovery. Imo, investors who expected record sales to be announced in the update may need to temper their expectations somewhat
My thoughts on today’s update:
• With CARD’s market cap moving by the minute, I’ll apply a £256m market cap (a share price of 75p) for the purpose of this point. A £70m raise would translate as a 25% or so dilution from the aforementioned market cap. It would therefore reduce potential upside by roughly this amount. Fair value for me before today’s update was around £1.80 (with a margin of safety factored in and a P/E of 12). Such a dilution would bring my valuation down to around £1.35. Consequently, I trimmed my holding to reflect this potential shift in risk vs reward. I trimmed in 2 small tranches, at just over 80p, However, note that 19% of my portfolio (including cash!) was in CARD this morning, so yes, I was significantly over-weighted. As this stock is still well below fair value imo, if a raise is announced, I will be buying as much as I can. In fact, if we see sub 65p, I’ll start buying more shares.
• Retail sales: on this point, I’m honestly not concerned as many people are still irrationally fearful of Covid and the Indian variant, so even a satisfactory performance from our stores is remarkable imo. Moreover, the weather has been dreadful and many consumers are still in the process of changing their habits from online shopping back to retail I.e. ‘I go to the supermarkets now to buy food, but I’m not going to risk going clothes shopping or the like, just yet’.
• The biggest issue with CARD imo is the balance sheet. If cash is raised, it will strengthen the balance sheet significantly and give us a sound foundation to build upon.
• A fall in online sales is hardly a surprise to anybody, is it?
To conclude, I don’t blame anybody for trimming today, although, as per usual, I think a lot of people are attempting to time the market. It was fairly obvious that today’s announcement was going to result in a pull-back imo, so I think many will have decided to jump ship until the share price finds a new support. Just like always with this stock, expect a break-neck rebound when it finally does start moving upwards again as there will be a huge swathe of buyers looking to buy back in. CARD investors and traders seem to love overreacting to news; it behaves more like a cryptocurrency than a value stock!