Think Long Term11 Jan 2021 21:04
In my opinion - after scrutinising reports & financials of Card Factory recently, I have decided to buy.
Whilst there is a significant short term risk re coronavirus etc - you have to remember there is a solid business behind this that used to consistently return good money to common shareholders - (perhaps too much of a dividend return, which has got it into this trouble - but this can be solved post covid by a lower reintroduced divi long term).
Admittedly, the balance sheet position / tangible book value is not the best - usually this would shut off any investment making decision for myself - However, I feel I can look past this when the business pre covid was returning a 5 year average ROCE of approx 18.42%. (From 2019 report prior). On an earnings basis - 5 year pre covid EPS was approx 16.38. Therefore @ a share price of 42p it is trading on 2.56 times pre covid average 5 yr earnings. In my opinion there is a huge discrepancy between the real business value & the quoted price.
Whilst stating the obvious; the share price is depressed due to a concerning number of people thinking this company will go out of business or call for a placing. With the financing arrangements of a £200M RCF & also CCFF funding from the govt - I personally believe this company will survive the current crisis & current shareholders will not have their positions diluted.
Yes it's more of a Covid recovery play (like most around March) but this business has taken vital steps to overhaul its current operations (improve it's online business & company image), which appear to be working. I used to think about investing a year ago but was put off by the ancient website & quite pettily, the old logo!
A new CEO with potentially fresh ideas of cutting costs (Costcutter) to lean up the operations will surely boost chances of survival too.
Entering a post covid world - I am of the belief that people will keep buying cards. Even if the industry is very marginally reducing year on year, by being the market leader of low cost cards Card Factory can attempt to capitalise on this. Once everything is re-opened this company will carry on selling cards how it used to. Even if it is less than normal, the company should still be worth more than it is valued today. I would prefer any reintroduced future dividends mid term to be reduced in order to shore up the balance sheet more, to avoid problems again.
I think 18-24 months from now & there will be a lot of people wishing they bought into this well run business & not be put off by thinking it is the end of retail! This is a highly cash generative business - look at the past 5 years of cash flow statements & it used to frequently return £40m + to shareholders & market currently values it at £140M !!
When retail is done right it works & this company will return good money to holders in the mid-long term post covid. Buy.
Good luck all.
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