Good morning from Paul.
Interview with corporate bond expert, Paul Hawkins. Click here for the audio. It’s also been published on my podcast channel (“Paul Scott small caps”). I was burning the midnight oil yesterday evening, typing it up too (exclusively for Stockopedia subscribers) which is a separate post here. Very interesting, and I learned a lot (in particular that bonds do usually have covenants!). We discuss bonds generally, and also the SAGA 2026 bond, and how it relates to Saga equity (I hold).
Agenda – all written by Paul today, as it’s a Friday.
Likewise (LON:LIKE) – my first look at this challenger carpet distributor (with Headlam (LON:HEAD) being the dominant player in that sector). It issues a fairly mild profit warning today, due to tougher market conditions amp; higher costs. But it’s still profitable, and I check out the last balance sheet, which is solid (with freehold property included). Overall, I’m pleasantly surprised, and think this share is worth me covering in future. It could be a serious challenger to HEAD, as it’s growing fast, and already delivering revenues of c.£120m for this year, so not a small business any more. Potentially interesting longer term, maybe?
Franchise Brands (LON:FRAN) – issued a positive Q3 trading update yesterday, ahead of expectations. It looks a good business, which has established a strong track record of growth since listing in 2016. FRAN shares have been a rare strong performer this year. It’s not cheap, but does seem an impressive growth business, with scope to bolt on more franchise businesses.
Explanatory notes -
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Paul’s Section: Likewise (LON:LIKE)
18p (pre market open)
Market cap £44m
I’ve been meaning to look at this carpet distributor (a smaller rival to Headlam (LON:HEAD) ) since it listed in August 2021, but didn’t see much point, given that HEAD shares offer such good value, and a decent turnaround story too.
This is the only news today in my sphere, so I’ll have a quick look.
Likewise Group plc (AIM:LIKE), the fast growing UK floor coverings distributor, provides a trading update for the current financial year ending 31 December 2022 (“FY22″).
Revenues growing fast – Q3 growth of 96% (of which 26% organic)
FY 12/2022 revenues expected to “slightly exceed current market expectations”
Profitability “lower than originally anticipated” – blamed on -
- “Pace of investments”
- Inflationary cost pressures
- Unfavourable market conditions (blamed on Ukraine, UK politics, and hot weather)
PBT margin now expected to be c.2% (below existing market expectations)
Next year FY 12/2023 expecting similar profit to this year.
New distribution centre in Glasgow opening in Q1 2023.
Sticking to growth strategy, not trying to maximise short-term profits.
Claims a strong balance sheet, with over £40m NAV (I check out this claim below)
Dividends – planning on maintaining same level of divi as July 2022, in 2023.
Interim Results – these were issued on 26 Sept 2022, for the 6 months to 30 June 2022. I’ve had a quick look. Key points -
Very rapid revenue growth, up 108% to £58.4m in H1 (27% organic)
H1 underlying PBT £1.9m (up 77%). That’s a 3.3% margin, which compares favourably with the guidance today for FY 12/2022 PBT margin of 2.0%, which implies H2 not much above breakeven.
Lots of adjustments, so statutory profit in H1 was only £0.1m
Net cash of £1.9m
NAV £39.7m, less £10.8m intangible assets = NTAV £28.9m – that’s actually quite good, and means that 66% of the market cap is asset backed.
Note that £20.9m assets are “land amp; buildings” which is nearly always freehold property. This is confirmed in the narrative, with 2 freehold properties being mentioned. This is a strong positive for the shares.
Revised forecasts – thanks to Zeus for an update note today. It’s obviously lowering forecast profit, by 33% to £2.5m this year FY 12/2022. That’s on £120m revenues, so management is building a decent sized business here.
It’s still profitable, albeit reduced somewhat (but still above profit last year).
My opinion - this looks better than I expected, particularly the decent asset-backing.
This is a profit warning today, so the shares are likely to fall. Although I wouldn’t expect a particularly large fall, as the price is already very soft.
I much prefer larger carpet distributor Headlam (LON:HEAD) but it looks as if LIKE is becoming a significant challenger. Although it might struggle to be able to fund any more acquisitions without raising fresh equity, which existing holders probably wouldn’t want, given the low share price.
Overall though, for my first look at this share, I’m pleasantly surprised by LIKE, as I was expecting to dismiss it, but it actually looks quite interesting, if it can achieve greater scale. So I’ll add it to my mental list of things that are worth reporting on in future.
Note that the StockRank is very low, but it’s a new share (floated in Aug 2021) so there’s probably not enough data yet to produce a meaningful score.
Franchise Brands (LON:FRAN)
Market cap £208m
We should have covered this update yesterday, as it was ahead of expectations, which we always try to focus on (over, or under expectations are a priority for us here).
To get up to speed, I’ve just read an excellent review from Roland here in Feb 2022.
More recently, Graham reviewed its interim results here in July 2022, and saw himself being “won over” by FRAN’s good performance amp; track record.
Even though I write a lot of the material myself here, the SCVRs are so useful as a quick way to get up to speed on the key issues, for hundreds of companies.
As you can see from the graphs below, there’s an excellent track record since it listed in Aug 2016. The key one for me is EPS, because FRAN has issued a lot of new shares to fund acquisitions, but if EPS is still growing strongly, then it tells me the acquisitions have been good.
Also note from graph 4 that this share has been consistently highly rated, so the forward PER of 19.8 showing today on the StockReport is relatively low -
Strong contributions by Filta North America and Metro Rod
It says these two are the biggest businesses within the group, and both trading well.
Board confident of exceeding current consensus market expectations for the full year
Graham looked at the acquisition of (listed) Filta in July 2022, and thought it seemed a good deal. Today FRAN says that Filta has benefited from the elevated price of cooking oil, because Filta can double the useful life of this expensive ingredient. That sounds positive. Dollar earnings have helped, translating into higher sterling amounts – but watch out, because forex is often swings amp; roundabouts. So one year’s tailwind, could be the next year’s headwind maybe?
Metro Road, and Metro Plumb are also doing well.
The only negative comment is this -
The B2C Division continues to experience headwinds in franchise recruitment and retention as a result of the unusual conditions in the labour market in the UK.
I’m not entirely sure what that means?
Overall - with thanks for the footnote, which saves us all time, and gives clarity.
Overall, the Board expects the Group’s revenue, adjusted EBITDA, and adjusted EPS for the year ending 31 December 2022 to be ahead of current consensus market expectations*.
* Consensus market expectations for the financial year ending 31 December 2022 are revenue of £92.9m, adjusted EBITDA of £14.3m and adjusted EPS of 7.31p.
I’m not interested in EBITDA, but adj EPS is usually fairly reliable.
Broker update - thanks to Dowgate Capital, which has modestly raised its FY 12/2022 expectations from 7.3p to 7.7p – not bad in the current macro conditions I’d say.
FY 12/2023 is little more than guesswork for many companies, but they’re pencilling in 8.3 adj EPS.
Valuation at 160p/share comes in at a PER of 20.8 for 2022, and 19.3 for 2023.
This is a tricky one – can we justify a high PER in a bombed out market? I’m much more comfortable with toppy valuations (relative to the market) when a company is trading well, as this is. Also, FRAN has now established a really good track record, so clearly management is doing a good job, and has lots of skin in the game too.
My opinion - it’s not cheap, but that’s because it has a good track record, and is trading well. So it’s really up to you to decide if you’re prepared to pay a fairly full price, or not.
This bit from the Exec Chairman’s comments is interesting -
“I am particularly pleased that the acquisition of Filta has given us a significant international presence in the large franchise-friendly North American market. This will considerably enhance our scope for both organic development and accretive B2B acquisitions.
Note that management trumpets the “strong ungeared £100m balance sheet”. I’ve just checked, and £86m of that is intangibles (goodwill on acquisitions). Remove that item, and we’re left with an adequate, but quite modest balance sheet. It does have £7.5m net cash (this is as at 30 June 2022). So for a £208m mkt cap company, there’s actually very little asset backing, but that’s fine as this investment is about profit amp; cashflows, not assets. It does however mean that any more meaningful acquisitions would need either fresh equity issuance, or taking on debt, or a mix of the two. Management seem good at acquisitions, so neither is necessarily anything to worry about, and in a downturn there might be some good opportunities?
Very good-looking chart, you would hardly know there’s been a pandemic, or a financial crisis from this, and FRAN has done well since it listed -
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