How to invest. Step 1 - seek views from a cynic. RJH emails MD...

MD,

Am I mad?
I frankly hesitate to admit serious intent on this - a sofa maker. Had assumed housing market would have been screwing the bejesus out of it but, if so, effect well hidden (SCS Upholstery; EPIC=SUY, 329p. Buy-model likes it up to 310p).

I believe, and I realize this strays somewhat into the realm of the Unknowable, that even with a second half pbt affected by 7 new shop openings (no rev, only costs, for a quarter post-open) that the final dividend will be raised at least 20% for a full year payout of circa 17p (yield over 5%). On past form (function of pbt it would seem), that may be conservative - turnover going great guns and cash piling up. And therein lies the trap - an awful sales performance is curtains (or is that cushions?) for awhile.

Scene setting:
Having grown dramatically 1999-2004, usually at the expense of b/s liquidity, SCS now are in a position where it is clear they cannot (sensibly) open stores quickly enough to have turnover match previous trend. It is/has been a company where growth comes from expansion, not like-for-like (although that has been remarkably good over the last 18 months). Five years ago the annual report said they aimed to have 70 stores by now. They will have 73 by year-end. There's still growth opps but it'll be low double digits (turnover) for the medium term unless they go mental.

But here's the thing:
Their cash pile, on this slower capex-growth outlook, is large and set to increase: £19.2m on total assets of £61.6m at '05 half. That's 58p/share (shares at 327p) and 31% of total assets. Net current assets are £4.8m. I estimate (see attached) fyr '05 cash will increase to £25m or circa 76p/share (perhaps another 5-8 % points of total assets) on turnover of £158.3 and pbt of £16.4m.

Thinking of writing to the Finance Director - what's going to happen to that underperforming cash going forward?

RJH

5 year SCS Upholstery results/FYR '05 estimates spreadsheet

NB: MD replies tomorrow

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