How to invest. Step 2 - avoid risks with no obvious counterparty, aka don't arrive early. MD emails his reply to RJH...

RJH,

My comments for what they are worth.

Recommendation:
A bit like Matalan they've grown very fast; there has at some point to be a slow down. Now seems to be the time when that will happen. Whether they are lucky with the cycle and the fyr September 2005 results are good and it's in the first half of the new financial year that things turn down big time - I can't say. But I think the point is we're 18 months too late. Too risky for me so now so I'll avoid.

But I'd buy on signs of economic recovery. And yes, I know we're not, apparently, in a recession.

Rationale:
I've had a look at the spreadsheet and the assumptions (for a growing business) seem reasonable - if you think growth will continue. I've also just this minute found the interims (via Google) which, perhaps curiously, aren't on the investors page nor are the 2003 results - a poor year. Their absence is, I'm sure, an oversight! I also note these are draft audited not the pukka job.

* Management appear to act quickly - so probably a sound team;

* I note that they quote the order intake for 33 weeks (ie 8 month performance) is up 6%, so well shy of the growth they've reported of 19%;

* I also note that a (new) director (Editor: the Finance Director) bought in July;

* I see they have also closed another depot (Hitchin), there will be some costs for that (though may be they are already booked), there may be distribution problems as a results but probably not significant;

* Looking at the prior year to 2004 I noted:

(a) "progressive dividend policy" - euphemism for over distributing
(b) "major and specialist player" - erm, can you be both?
(c) [2003]"..disappointing result being well documented" (not to me)
(d) only recognise sales when delivered (I assume already paid for) and thank goodness for that
(e) "unique mezzanine floor layout" - well knock me over...
(f) "...20-25 suppliers...approx. 75% UK based...& regional exclusivity"
(g) admin expenses up sharply 18%...can't all be staff costs can it?
(h) Web site - "Cor Blimey guv - just like the Sun & it has an 'enders chap flogging the stuff!"

* Cautionary note - retail is very tough at present, particularly furnishing;

* health of housing market has a major impact on their volumes;

* they are (I think) heavily biased to the north where spending power may be squeezed more;

* I'm guessing like-for-like will show a decline in the second half; they are expanding very (too?) aggressively; and they will be (are) caught in the upwards only rent reviews;

* how secure are their cash flows - is it all via a fin co?

Usual disclaimers.

MD

NB: RJH Verdict - still attracted by that cash pile. But share price at 327p does not cover the risks, even assuming enhanced divi payment. Mid-2006 (pre-green shoots if in a recession) may well be the moment for what, at that time, looks a contrarian move into cash and cash-flow rich retailers like SCS.

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