Pick that Fossil (FOSL US), an interesting value stock

The story: Fossil watches came under the radar more than a year ago, after reading about them on a post at Value and Opportunity, one of the blogs that I admire. Since then, the stock is down more than 60% as Fossil is in the middle of two transitions:
a) tries to accelerate the shift from mechanical watches to smartwatches (acquired the Misfit activity trackers/smartwatches and cross-fertilised their technology developing an interesting wristwatch collection)
b) tries to increase online sales while closing shops in department stores
Though Fossil doesn’t have enough time left, as debt could become an issue if the turnaround doesn’t bear fruit in the next two years.
I think today the stock offers an attractive risk-reward balance. If the transformation programme works out, then the stock could become a double or triple bagger. Of course, there is the downside that competition accelerates eating out their small market share. In that case, Fossil could become the next Motorola or Nokia. I want to believe the founder, Mr Kartsotis (owns around 15%) wouldn’t let his poster child go bankrupt.

Read more

Sirius Minerals ($SXX), digging deeper into the myth

Is the recent dip in stock price an opportunity to buy?

3 interesting facts that every investor should take into account.

A)The external auditor warns the company might go bankrupt because Sirius is running out of cash. PricewaterhouseCoopers reports: “The Group is involved in efforts to secure short and long-term finance for its polyhalite project in North Yorkshire, the outcome of which is uncertain.  These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.”  (going concern means “open for business”)  Read more

U & I Group (UAI LN), London property at a discount

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U & I Group, previously called Development Securities, is a property developer, focused in London and the South East. Caught my eye because currently trades at a discount to book value (P/BV x0.64) and offers a decent yield (3.1% currently, analysts expect it to double) and at a reasonable P/E x12. The stock price is -20% year to date, surely uncertainty around Brexit hasn’t helped.

One of the  U&I developments

399 Edgware Rd portfolio

U & I operates under three segments: property development and trading properties (valued at GBP 180m and GBP 80m respectively), an investment portfolio (could be valued at least 200m) and investments in various JVs, booked at GBP 90m

 

Property development: management targets ROE between x2-x5 times initial equity investment, with a maximum investment size of GBP 15m. How they achieve this spectacular ROE? They focus on an attractive niche: project developments worth between GBP 50m and GBP 100m. These projects are too big for individual property entrepreneurs and too small for many of the property companies.

U & I has a conservative policy valuing property investments at cost until completion. Subsequently, much of the profits from these investments haven’t hit the P&L and remain ‘dormant’ on balance sheet. Management expects GBP 55M of property gains in the fiscal year ending February 2016, GBP 23m of which are already recognised in first half. Management expects an additional GBP 115m over the next two years, which is about half current market cap.

U&I collaborates closely with local councils in building regeneration projects. This segment was strengthened in 2014 after the acquisition of “Cathedral” at just above the net asset value. In regeneration projects, the land element is typically contributed by the local council, offering higher return on equity to U & I.

The investment portfolio has a net rental yield of about 7%, these asset spread across the country with occupancy of 95% or above and occupiers like Waitrose and Matalan.  
Management uses the rental income from investment portfolio to fund the property development segment.

Management’s incentive plan is based on NAV per share growth, full payout targets 12% growth p.a for the next 4 years. I think the bar could be set a little higher. Nonetheless, the Deputy CEO owns 2% of the shares.
Net Debt comes quite high at GBP 215m but loan to value is 45% and average interest rate 6% which could move to less than 5% as projects mature.

 

Hostelworld (HSW LN) stock price seems over-sold

Hostelworld (HSW LN), cheap and cheerful 

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Summer is here and most of us think about holiday. I will never forget the great time I had in hostels, those days balance between cost and convenience was tilted towards cost. One interesting stock that taps into the growing demand for travel among millennials is Hostelworld. IPOed recently, floated on a 5 start valuation but ended up 53% lower as market was expecting growth but bookings entered a soft-patch in Europe, after the recent events in Paris/Belgium. I think there could be some hidden value at current price. 

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Business: Hostel booking service, market leader in hostels, followed by booking.com. Technology is developed in-house (both app and web-platform). Their business model is quite straightforward, customer searches and books accommodation through the app, Hostelworld collects a deposit, customer pays the balance at the hostel upon arrival. Employes 256 people across Dublin, London, Shanghai and Syndey.

22% owned by Woodford’s Patient Capital.

 

HostelWorld’s recent campaign: In Da Hostel with 50 cent, costs almost 50 cents of every 1 euro collected in Revenue.

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FY15 Results: bookings grew 1% to 7.1m, Net Revenue Eur 83.5m  +5%yoy,
EBITDA 23.6m. Profit after tax: Eur 21m v 25.6m yoy impacted by higher marketing ‘investment’. Marketing expense is the single biggest expense item, came at Eur37.4m (+29%) or 44.7% of revenue, which means for Euro 1 HSW collects, 45c go to marketing

G&A came at 64m as marketing increased Eur +8.5m

Net Cash of 13.6m

Capitalised R&D: 4.3m v 1.4m yoy staff costs (not so good)

Divi: recommended 2.75c, policy payout 70-80% of profit after tax

Brand positioning:

Integrated Hostel Bookers and Hostel World brands, with Primary focus on Hostelworld.

Hostelwold contributes 3/4 of bookings and reported 17% growth

Mobile: 41% of bookings were though the mobile app, 59% via desktop

Geography: UK is only 12%, rest of Europe 34%, US 24%

Target Age: 78% between 18 – 30 yrs olds

Generates Eur 22.6 per booking on average

Valuation:

Market Cap GBP 148m, EV/EBITDA x7.1, Divi 1.4%, P/E 8.7

Assuming net income falls 8%, in line with consensus and comes at Eur 19.3m

then HSW trades at forward P/E x9 and a potential dividend yield of at least 7%

Most recent guidance: AGM statement 26 May:

– trading in Q2 has been below management’s expectations, due to softer demand in EU

– average booking value has been lower

– marketing expenditure will be below the previous guidance of 45% – 50% of revenue

-It’s all about the Summer:  ‘the year’s outturn will be depended on the recovery in key European destinations over the important summer travel season’

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App Annie statistics show downloads across key countries remain stable, the 8% revenue decline projected by consensus seems fully priced in.

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Key risks:

Goodwill and Intangibles reported on Dec 15 with a carrying value of Eur 159m, representing 88% of total assets. Most of these non-tangible assets relate to domain names (Eur 136.8m). Management has fully written down the goodwill from hostelbookers acquisitions. Total impairments came at Eur 50.6m (or five year’s worth of amortization)

you can see but can’t touch..

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Insiders started buying

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Stock Spirits share price ready for a shot

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Stock Spirits (STCK LN) : 

Is a leading vodka maker in Poland with a considerable market share in Czech Republic as well. Trades at a deep discount to peers, after giving shareholders a bad hangover. I think the worst is priced in and current valuation doesn’t recognize the strong cash generation and leading market position. The strong balance sheet should help weather the current de-stocking storm. STC gpo

 

 

 

 

Market cap GBP 207m (Eur 282m) Net Debt Eur 92m, EBITDA JPM forecasts EBITDA Eur 51m for FY15 and Eur 67m next year.
Valuation: EV/EBITDA x5.6, P/E 15 and forward P/E 12 (cheapest in the sector), P/BV x1.7, ROA 5.7%, ROE 11% (not too bad), Divi 2%
Revenue: Poland 60%, Czech Republic 20%, Italy 12% (decent exposure to the Eastern European convergence theme)
Management: downgraded profit guidance from Eur 60-66m to Eur 50-54m, which came around 20% below Bloomberg consensus.
Deteriorating trading conditions in Poland:
– wholesales delayed placing new orders, as they had accumulated high inventories ahead of the tax hikes
-Discounters continue to grow faster and stock spirits in under-represented at discounters because it has a premium positioning. Stock Spirits launched
– competition remains intense as Marie Brizard (no 3 player) relaunched its flagship Krupnik brand with heavy promotions in November.
-The key competitor Roust (CEDS – now remained Roust Corporation) discounted heavily as the Russian parent needed desperately the cash tied in inventories, to pay downs their USD denominated debt. Roust had Net borrowings as at 31/124 of USD 882m or x8.2 EBITDA, priced at a distressed coupon 10%. (sooner or later they will have to focus on profits, rather than only volumes – easing pricing pressure )
-Problems in Poland started from the disruption arising the 15% rise in excise duty on spirits on 1/1/14, which added 8% to the retail price. Stock Spirits’ reported revenues fell 8, reflecting de-stocking by wholesalers. But supply flow and stock levels should stabilize as consumer patterns get back to normal
Balance sheet remains robust with sensible leverage and Debt/EBITDA x2.4

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Shareholder list includes some decent names like Shroders, Prudenttial, Capital and Aviva, each of them owning 7% – 8% stakes. Perhaps some of them rushed to the narrow exit door causing the share price to collapse.

M&S share price needs a discount

downloadA quick analysis on M&S share price reveals that it had a stellar performance over the last 12 months, appreciating by  30% and outpacing even the archrival Next (NXT LN), which is up by “only” 12%.Screen Shot 2015-04-17 at 22.59.21 The results announced on 2/4/15 have shown growth in General Merchandise segment which accounts for 45% of total revenue) after 4 years of declines, driving investor optimist and hopes for cash returns.  Of course easy comparatives helped to paint a more positive picture and I believe the consensus already incorporates an optimistic growth expectation with margin improvement. However, it seems like the consensus ignores the company’s weak balance sheet and it would be very interesting to see on the upcoming full year results (20/5/15) what steps management took to heal the weak spots we discuss on this post.

Segments: Most of the revenue is UK driven and split between 50% in Food and 40% in General Merchandise. M&S international division is heavily exposed to Russia, Ukraine and Turkey and faces continuing deterioration

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Online: M&S made a promising start building its own distribution centre in Doncaster but it suffered from an outage, although last year management spent GBP 247m in “Supply Technology” CAPEX.

Consensus on M&S share price : appears quite optimistic, in my view, as it assumes for the next 2 years a similar growth rate to Next although half of M&S revenue comes from food sales (are actually in deflationary territory). Consensus also expects an improvement in Operating Profit margin (OP), assuming no-margin erosion from online sales.

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Volatility: we can see Revenue and Margins for M&S  have been historically volatile and difficult to predict. Trading at x17.2 times next year’s bloomberg earnings v x16.8 for Next  (NXT LN), the stock is priced for perfection.

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Spending money unwisely: in the past return on some investments was particularly poor, to cite two examples: M&S bank suffered, over the last 2 years GBP 66.3m losses for misselling Payment Protection Insurance. This is about half the operating profit from the International business. It’s is quite impressive how a tiny little revenue segment can make such damage…The second example is about  the GBP 99.3m write-offs related to the closure of a logistics site, store closures in Ireland, China and Czech Republic. Well, I thought closing stores and opening new ones is part the bread and butter of a retailer, however M&S took the view these are ‘one-offs’ and decided to exclude them from the normal operating profits.

Audit rotation: M&S put their Audit on tender and Deloitte won, replacing PWC that had been auditing them since 1926 (this means loyalty..) Reading the audit report it is interesting to see that ‘Supplier Rebates’, a key area of risk highlighted blew up  at Tesco’s wasn’t picked up as a risk. I am looking forward to reading Deloitte’s report and see if they consider any new areas of risk (Ukraine maybe?)

Magic picture – Find the hidden debt: A very common “window dressing” trick among retailers is to make “sale and lease back” transactions, to reduce debt and improve liquidity. This is a temporary cosmetic adjustment as it relies on short term leases (that can be expensive) to fund long term infrastructure needs.
The total amount of these commitments amounts to the staggering GBP 4.6bm. This is almost half of today’s market capilisation. (anyone steel hopping for a divi increase? )

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Old habits die hard and last year M&S indulged to one more “sale and lease-back” to get some extra cash that needs to repay soon as a rent loan.

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Pension conundrum: Last actuarial valuation took place in March 2012 and estimated a deficit of GBP 290m. The next valuation is due to be carried out for March 2015. Probably actuaries are working on it as we speak an update is expected by November 2015. In this low interest environment is very likely the deficit will be much wider as the expected return from the fixed income investments has shrunk.

Derivatives: The disclosure on hedging says management took a position on a GBP 1.6b derivative to lock the FX exposure related to supplier payments. However, the trade payables (i.e. suppliers) are GBP 1.14b. So that leaves us with a speculative naked position of GBP 0.5b, unless there is something I ‘ve missed..

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Adjusting Leverage :Net Debt as reported at year end (29/3/14) was GBP2.46b, adding the pensions GBP 260m and the recent Sale and Lease back of GBP 100m Net Debt increases to GBP 2.82b. EBITDA was GBP 1.24b, adjusting for store closures excluded from reported profits (GBP 0.99m), EBITDA declines to GBP1.14m The new Net Debt / EBITDA ratio becomes x2.47 higher than targeted x1.5 – x2. If we consider the operating lease commitments as borrowings, because they have exit clauses and management intends to honour them, then Net Debt skyrockets to GBP 7.4b and Net Debt to EBITDA deteriorates to x6.5
Good luck to the shareholders awaiting for share buybacks to boost M&S share price  🙂

A snapshot with key ratios:

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