1x 2 PAUL SCOTT Small Cap Value Report - comments today!!14 Sep 2020 13:14
This has become my largest personal long position in recent weeks. I know the business very well, and believe that a combination of misjudged short selling, and indiscriminate selling by so-called ethical investing firms (triggered by re-hashed allegations of supply chain problems in Leicester), may have created an artificially advantageous buying opportunity.
As it's become my biggest holding, I spent some time over the weekend revisiting the facts & figures, to reassure myself that risk:reward is still favourable.
Downside risk - this comes mainly from an adverse market reaction to the findings of the supply chain investigation which is due to report directly to BOO tomorrow (15 Sept). The timetable is that BOO will then update the market on its findings, together with its Q2 trading update (June, July, August trading) on 30 Sept.
It's not clear whether the report is going to be published in full, or whether BOO will filter it and summarise the findings? If the latter, then there is clearly scope for BOO to edit out any unhelpful details.
The bottom line with this supply chain issue, is that it won't affect profitability, and the liability for any malpractice rests with the suppliers concerned. All manufacturing is subcontracted out, so there should not be any liability with BOO itself, I believe.
Commentators who say that BOO's profits are built on low wages in Leicester, don't know what they're talking about. Leicester is used for convenience, not because it's cheap. As mentioned here before, the product can be made far more cheaply in Bangladesh, and then air freighted into the UK. Which is what some of BOO's competitors do. Therefore moving production abroad will raise gross margins, not lower them.
Overall then, I see the risk being purely of another short term, sentiment-driven spike down in price, which would present us with another buying opportunity.
Last trading update - I looked again at the RNS on 17 June 2020, updating on Q1 progress. It's remarkably good. After initially weak lockdown sales, trading rebounded, and the group hit +45% sales growth vs LY Q1. Core UK growth was +30%, but overseas much better, e.g. USA +79%, Europe +66%. Total international sales are now half the group total, and growing faster than the UK, so by now are probably exceeding UK sales.
New brands were all trading well in Q1. Gross margin was up to 55.6%. Guidance for the full year was raised. Longer term guidance is for continued revenue growth of +25% p.a. 2 new brands (Oasis & Warehouse) bolted on for just £5.3m.
On the back of this, the share price rose to over 400p. It's now just over 300p, so the supply chain issue is knocking 100p+ off the share price, for no reason.
I reckon EPS could rise to c.20p in 2-3 years. Put that on a PER of 40-50 (justified by the continuing growth), and we've got a share price target of 800-1000p, with patience. Hence why this is now my largest position.
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