Cube UK Report (25 Jan 2021) – Smooth start for H&T’s new CEO

Cube UK Report (25 Jan 2021) – Smooth start for H&T’s new CEO

Good morning!

There’s plenty to look at this Monday.

I’ll start with H&T (HAT), which I own, and then look at:

  • Boohoo/ASOS
  • IG Design
  • Altitude

Finished at 10.30am.

I’ve also published a new article by Andy for our subscribers, Investing in D4T4 and Venture Life: is there jam today and tomorrow?. Worth checking out!


H&T

  • Stock data should display here.
Market cap £116 million
RNS Trading Update
Writer disclosure Long HAT.

Covering a smallcap here to start with, since it’s one that’s close to my heart. It’s one of my larger positions.

Today it announces that full-year profit before tax will be ahead of market expectations.

I can see a forecast at £11.8 million, with after-tax net income of £9.4 million.

So perhaps net income can make it to £10 million+?

You can see that the market is slow to award this one a decent earnings multiple – because of what it must perceive to be limited growth prospects. and the credit and regulatory risk inherent in the business model.

Anyway, let’s dig into the information in this RNS a little more.

Operationally:

  • “Almost all” stores remain open, since financial services are considered essential.
  • Retail sales available through click and collect or delivery.

Financially:

  • Retail sales in H2 down 6% versus prior year.
  • Returns from precious metal scrappage up 58% in FY 2020.
  • FX income at 65% of prior year (i.e. down 35% in FY 2020).
  • Year-end pledge book is £48 million, not changed since November.
  • Balance sheet cash £34 million, undrawn £35 million bank facility.

Regulatory risk:

  • Working with FCA on high-cost short-term credit (personal loan) review, going as planned but delays expected.

CEO comment – a nice upbeat comment but no juicy details.

Worth noting that this is the first update from the new CEO after a very long period of time under his predecessor.

His previous role was MD of consumer credit at Provident Financial. He seems like a good fit.

My view

I’m content with the new CEO appointment. As for the business, it appears to be in rude health, despite the circumstances. I believe that it continues to treat its customers fairly, and I’m glad to see the reference to payment deferrals for customers in this RNS (where the customers have been financially impacted by Covid, and a payment deferral is “in their best interests”).

Clearly, a lot of the good news for the company in 2020 related to the share price. But I don’t have any problem with that: I’m invested in this company partly because I want gold price exposure.

This means we have to be prepared for company performance to suffer, if the gold price shrinks again.

Personally, I’m more comfortable owning this company rather than a gold miner, to get my precious metal exposure.

As for valuation, H&T’s share price hasn’t gone anywhere in a while. It was “cheap” around 2014-2016, but since then it has been darting around within this 200p-400p range.

Obviously I do think it is undervalued, but that’s because I expect the FCA action to lead to a very mild outcome, new management to be competent and conservative, and the gold price to remain very strong. I could be wrong about all of those things. That’s what makes a market!

 


Boohoo

  • Stock data should display here.
Market cap £4.4 billion
RNS Strategic Acquisition
Writer disclosure No position.

Some dramatic headlines for newspaper writers with this one:

boohoo, a leading online fashion retailer, announces that it has acquired all of the intellectual property assets (including customer data and related business information and selected contracts) of Debenhams Retail Limited (in administration) (“Debenhams”) from its joint administrators, for £55 million (plus VAT) in cash (the “Transaction”).

I must admit that I didn’t see this coming!

Boohoo will use it to “grow the Group’s target addressable market and increase the share of wallet opportunity“.

So in addition to targeting new consumers (older ones, I guess), Boohoo Plc will also be able to hit the beauty, sport and homeware categories.

Chairman Mahmud Kamani describes it as a “transformational deal“, helping Boohoo to create “the UK’s largest marketplace” on the Debenhams platform. Boohoo will use Debenhams to build a venue where more third-party brands can sell and where it can focus on building its cosmetics activities in a serious way.

My view

It’s hard not to think of this as a positive development for Boohoo. Note that the cost price is a little over 1% of the company’s current market cap – in that sense, it’s not even particularly expensive.

You could argue that if it doesn’t work out, the primary cost will be the opportunity cost of management time spent on it. The financial cost does not look onerous (though I don’t know what additional sums Boohoo might plan to invest in Debenhams). The Boohoo cash balance at year-end was £386.9 million.

Retail stores, stock and financial services won’t be coming across to Boohoo. So no retail store jobs will be saved by this action.

Overall, I’m intrigued by this news. Looks like a deal with limited downside, and some strong potential upside.


ASOS

Response to media speculation – I note in passing that ASOS are also possibly swooping for Topshop, Topman, Miss Selfridge and HIIT.

The retail revolution was underway long before Covid. Covid is the accelerant – in the new world, there will be very little clothes retail taking place in person. And the owners of your favourite brands will be the upstart websites which helped bring about the demise of the physical stores.

 


IG Design

  • Stock data should display here.
Market cap £523 million
RNS Trading Update
Writer disclosure No position.

Let’s get up to speed with this large maker of party/celebration-related products.

It completed a large US-based acquisition in March last year (not great timing?).

So we have to look for the organic growth, as well as headline growth in this full-year update:

  • sales up 35% year-on-year to $737 million (about a third of sales from the new US entity, CSS).
  • organic sales down 9.2% in the pre-existing group, and CSS also sees sales fall by around that amount.
  • net debt reduced to $26 million.
  • adjusted profits up in the period since March, driven by the addition of CSS, cost reductions and synergies.

Business operations and the integration of CSS all appear to be going fine, despite the potential for disruption from Covid and Brexit.

The company maintains a cautious tone in the outlook statement:

The Group continues to note the effect of Covid-19 and in particular, the impact of the current lockdowns around the world. Whilst demand for the Group’s product offering remains robust, the ongoing restrictions, together with associated macro-economic challenges, create ongoing uncertainty. For this reason, whilst the Board notes that performance in the nine months to 31 December 2020 has been stronger than expected, the full year outlook remains in line with current market expectations.

An interesting stance to take. The first nine months of the financial year (April to December) have gone better than expected, but IGR doesn’t want to ugrade its full-year outlook.

The market has done it for them, pushing the share price up 3%.

My view – I should have bought this one years ago, but I was never quite sure about the underlying quality. Is it really possible to build a long-term competitive advantage in something like wrapping paper?

I’m now genuinely impressed by the performance over the last nine months, and I’m starting to think IGR might be worth looking into. And it could genuinely be “cheap” at the current market cap, if net income forecasts of £50 million+ are met in the next few years.

 


Altitude

  • Stock data should display here.
Market cap £20 million
RNS Interim Results
Writer disclosure No position.

This was pitched to me a while ago – it’s creating a marketplace for promotional products in the US.

But if failed to meet expectations in 2019, and the share price has struggled since then.

Let’s see how it did in H1 (six months to September 2020).

  • adjusted operating profit of £0.3 million

This is “before share-based payment charges, amortisation of intangible assets, depreciation of tangible assets and exceptional charges“.

  • statutory pre-tax loss of £0.6 million
  • cash balance £1.2 million (down from £2.4 million at the beginning of H1)

Revenues were up 36% to £1.1 million.

At the US-based marketplace (confusingly known as AIM), Altitude says there has been continued growth in membership, with more services available to members, and lots of progress to look back on despite Covid.

Outlook

…pre-pandemic effort and our ability to act quickly and pragmatically in navigating the challenges imposed by COVID-19 have ensured our ability to trade profitably during this unprecedented period of disruption and has protected and positioned the Group for sustainable future growth.

My view

It’s a bit of a stretch to say that the group is trading profitably when so many adjustments were used in the calculation.

The unadjusted operating loss was £560k, and this is after including £0.4 million of Covid relief funding from the US Federal government.

The revenue growth is encouraging, but I think a lot of caution is needed here after multiple setbacks.

If you’re interested in checking out the AIM marketplace, here’s the link.

 


 

That will do it for this report.

Have a good day!

Graham

PS: I appreciate your thumbs up very much!

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    Hi Graham,

    You make a good point with regards the BOO acquisition of the Debenhams brand and website, that IF there is a downside it will be in management focus rather than the cost (£55m is relatively small beer with Boohoo’s current scale.)

    This does line up with my first thought though. I am no expert in this area of retail, however my understanding is that Debenhams were making decent traction with their online offering.

    However, my personal view is that if there were any “brand loyalty” to the website, much of it will have been linked to the high street presence. There is a risk in my view that “debenhams.com” without Debenhams on the high street will not seem like Debenhams at all to many existing clients, so these customers may not be very sticky at all.

    I wonder if the real winner out of this might ultimately prove to be Mike Ashely’s Frasers [FRAS]? There is still a place (much reduced) in the market for high street department stores, so I would expect Ashley will be running the slide rule over individual Debenhams sites with a mind to cherry pick the best and rebrand them as Frasers. I have been reluctant in the past to be invested in anything involve Ashley, but I may well have a careful look at Frasers in due course.

    No position in either at the moment, and all just my thinking out loud.

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