Subdued but inline trading, EPS upgrades
ScS Group has issued a trading update ahead of its FY2020 AGM which states that “it is clear the ongoing economic and political uncertainties are continuing to impact consumer confidence and spending”. LFL order intake for the 17 weeks ended 23rd November is reported down 7.1%. With orders previously reported at -7.6% for the first 9 weeks, this suggests a run rate over the latter 8 weeks of the period of-6.5% (albeit distorted by the timing of Back Friday). Management state overall trading has been in line expectations, and as such we leave our FY2020 CPTP forecast unchanged at our recently lowered £13.0m. However, we do take the opportunity to upgrade our EPS to reflect the Group’s recent purchase of 2.0m shares at 2.20p for cancellation. We therefore increase our FY2020 EPS by 3.6% to 26.0p, and FY2021 EPS by 4.9% to 27.6p. HOUSE STOCK.
27 Nov 19
A FY2019 beat, though current trading leads to a cautious FY2020 outlook
ScS Group has issued FY2019 preliminary results ahead of expectations, though challenging current trading leads us to take more cautious FY2020 assumptions. In FY2019 we highlight EBITDA exceeded forecast at £19.7m (SC forecast £19.1m), CPTP of £14.6m (SC £13.6m) and EPS growth of 4.8% to 28.1p (SC 26.4p). A 3.1% increase in the DPS is proposed, pointing at the strong balance sheet and confidence in the Group in our view. However, trading in early FY2020 has been challenging driven by unfavourable bank-holiday weather and increased consumer uncertainty, with sales down 7.6% YTD. As such we lower our FY2020 CPTP forecast by c6% to £13.0m, and diluted EPS by 7% to 24.9p (from 26.8p). On our revised forecasts (pre any IFRS 16 impact) SCS stock is trading on a FY2020 PER of 9.5x and an EV/EBITDA multiple of 2.6x, reflecting strong cash balances (£47.0m forecast for July 2020 excluding customer deposits). The stock is forecast to yield 7.0%, with a FCF yield of 9.9%.
01 Oct 19
Robust FY2019 trading – expectations and forecasts unchanged
SCS Group has issued a pleasing update for the 52 weeks to 27th July, which confirms very robust trading through spring and early summer despite the much-documented retail headwinds. FY2019 LFL order intake is disclosed to be ahead by +4.2% (2-year LFL growth of +5.2%), a highly commendable performance in our view which implies +6.4% through the past 19 weeks. With the performance said to be inline with management expectations, we leave our forecasts unchanged at this stage at FY2019 CPTP of £13.6m and EPS 26.4p. Trading on a July 2019 PER of 8.2x and an EV/EBITDA multiple of just 2.5x (reflecting forecast net cash of £38.1m) we view ScS stock as mispriced, noting the attractive yield of 7.6% (covered 1.6x by EPS and 1.3x by FCF). HOUSE STOCK.
01 Aug 19
Victoria (VCP): Acquisition of Keraben Grupo (BUY) | Premaitha* (NIPT): Litigation update (CORP) | Best of the Best (BOTB): In-line interim trading update (BUY) | Savannah Resources* (SAV): Further drilling results from the Mina do Barroso lithium project (CORP) | ScS (SCS): AGM update (BUY) | dotDigital* (DOTD): Acquisition (CORP) | Van Elle (VANL): Clarity needed (BUY)
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22 Nov 17
We examine wet-led and food-led capacity across the regions and conclude that excess capacity remains in the food-led segment (although Central, Welsh and Yorkshire regions lag the national average). Despite recent profit warnings, an increasing divergence in reported performance between pubs and restaurants, and a recent reduction in eating out frequency and spend, existing food-led operators remain too focused, in our view, on trimming estate tails and slowing rollout rather than substantial capacity reduction – and combined with smaller PE-backed concepts scaling up and landlord pragmatism, net new capacity continues to enter the market. Given the severe cost and competitive pressures, as well as downside macro risks, we foresee more pain across the sector – in the near term expect aggressive menu price discounting to continue, leading subsequently to margin pressure and forecasting risk for listed operators and financing risk for smaller, highly leveraged private operators. While rightsizing will happen (it did with pubs), the process may be protracted. We run the finnCap Slide Rule over the casual dining space, with our preferred pick (BUY, 19p PT) scoring highest on QVGM metrics. While not immune to sector woes, lacks an estate tail, should be a beneficiary of trading down, and has a number of self-help levers, as well as a management team that has seen the movie (many times) before.
SCS BOTB FUL HOTC IDP JOUL CAKE PHTM RGD RBG SHOE
16 Oct 17
Revolution Bars (RBG): FY 2017 results (HOLD) | ScS Group (SCS): FY 2017 results (BUY) | Tristel* (TSTL): EPA results (CORP) | Firestone Diamonds (FDI): Recovery of 134 carat gem-quality diamond (U/R) | Independent Oil & Gas* (IOG): Letter of Intent for SNS platforms (CORP)
SCS RBG TSTL FDI IOG
03 Oct 17
While the decline in pub numbers over the past decade has often been attributed to the smoking ban, a rebalancing of demand from drink-led to food-led occasions and an uneven playing field between pubs and supermarkets on beer duty and business rates, we think that pubs also need to shoulder some responsibility, having largely failed to keep pace with changing trends, in particular lacking concepts that appeal to Generation Z consumers and Millennials. In this report, we discuss the characteristics of ‘Gen Z’ and Millennials (socially conservative, fiscally cautious, digitally native); what they like doing (lots in social isolation, far less in pubs and clubs); and how to tempt them back into pubs (create an ‘Instagram-able aesthetic’, offer free wi-fi and more technology, widen the wet offering and embrace non-drinkers, offer pop-up ‘immersive activities’ and employ retro with special offers that cater for groups rather than ‘couply’ stuff). Generating a strong social media presence (not just Facebook but also Instagram, Snapchat and Twitter) allows operators to be with their customers well after closing time and encourages customers to do their marketing for them.
SCS BOTB FUL HOTC JOUL CAKE PHTM RGD RBG SHOE VCP
25 Jul 17
Alumasc (ALU): Interims show strong sales growth but some margin pressure (BUY) | Joules Group (JOU): Marginal increase to FY17E forecast (BUY) | CityFibre* (CITY): Prospects shine (CORP) | Nasstar* (NASA): Trading update (CORP) | SCS Group (SCS): LFL order intake slowed during Q2 (BUY)
SCS ALU JOUL CITY NASA
31 Jan 17
The Slide Rule
What is The Slide Rule? The Slide Rule has been designed to dramatically simplify the identification of the best companies in the UK small/mid-cap sector by making a quantitative assessment of the relative potential of each company. At its core, The Slide Rule aims to identify those companies that create genuine shareholder value through strong returns on capital and solid growth, but also present a value opportunity with the potential tailwind of earnings momentum. Companies are assessed within a Quality, Value, Growth and Momentum (QVGM) framework.
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12 Jan 17
Fenner (FENR): Forecast upgrade prompts Buy rating (BUY) | Transense Technologies* (TRT): Upbeat AGM statement (CORP) | Avacta* (AVCT): To affinity and beyond… (CORP) | ScS Group (SCS): AGM statement (BUY) | BATM Advanced Communications* (BVC): Animal vaccine maker orders second sterilizer (CORP) | Redcentric* (RCN): CFO appointment and Financial Adviser resignation (CORP)
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23 Nov 16
Looking at the top 50 non-listed casual dining and bar operators, it appears that the £80bn market for eating and drinking out in the UK is alive and well. The AlixPartners Growth Company Index (October 2016) shows that 2-year profit CAGR has improved over the last few years, and recent surveys from Greene King, Coffer Peach and Deloitte highlight elevated spend on out-of-home occasions. We attribute this to 1) a shift amongst consumers from an ownership to experience-led mentality which has driven habitual spend on leisure 2) an increasing focus on food from historically wet-led operators as they diversify their revenue streams to mitigate competition from the off-trade and match consumer gravitation towards eating out and convenience; 3) increasing regional penetration resulting from oversupply and high rental costs in London and 4) strong sector support from Private Equity investors, attracted to the Leisure sector's cash flow profile which can be leveraged against. Nevertheless, we may look back on 2016 as the peak for casual dining and bar operator profitability, particularly for London-weighted operators who face unfavourable rent and rate costs as well as potential loss of cheap migrant/seasonal labour. Past performance is certainly not a guide to future performance.
SCS BOTB JOUL CAKE PHTM RGD RBG SHOE VCP
04 Nov 16
N+1 Singer - ScS Group - Strategic progress and trading momentum point to upside risk
PBT increased 75% YoY underpinning our view that last year’s disappointment was driven by adverse trading conditions out of their control and that the strategic growth plans have significant potential. The drop through to profit from 14% sales growth would actually have been better but for particular step-changes in opex for bonuses and marketing. We estimate pre bonus EBITDA leapt from c£12m to c£22m including that additional marketing. With new stores performing ahead of expectations, 4 new openings planned for FY17, and a positive start to Q1 (+4.5% LFL) we believe there is upside risk beyond small tentative upgrades today of c5%. The valuation is compelling.
04 Oct 16
FY16 results ahead of our expectations
FY16 numbers came in ahead of our expectations. While current trading has unsurprisingly moderated, the Group is still trading positively and the higher base set in FY16 leads us to increase our adjusted EPS forecasts for FY17E and FY18E by 12% and 10% respectively. We retain our 230p price target, given consumer confidence has become more volatile post the referendum.
04 Oct 16
There is a brave new retail landscape, and who would wish to be a retailer? Consumers are breaking the mould, mobile Internet is transforming shopping behaviour globally, everyone is aspiring to create the principal relationship with the consumer and there will be more retail casualties on the horizon. Those that stand the best chance of survival will be able to 1) accept the certainty of uncertainty 2) be prepared to widen the risk envelope 3) be constantly vigilant to new entrants 4) champion innovation and 5) prioritise effectively.
SCS CAKE PHTM RGD RBG SHOE
10 Aug 16
More upgrades as trading strengthens against weak comps
ScS has delivered growth of 15-20% in the order book since it last reported 2 months ago, reflecting good performance in growth markets against weak comparatives. Brexit fears have not affected spending in their customer groups. With good delivery on gross margin and marketing the operational gearing should flow as we have previously highlighted (i.e. c35% drop through from additional sales). Today’s upgrades will therefore be of the order 10-15% (recognising that warmer weather, EUref and normalising comps from July make for a harder final 2 months). This takes incremental upgrades to c45% since we flagged unrealistic consensus assumptions last year. The rating is miserly on <3x EV/EBITDA so the shares have considerable scope to outperform. There is yield support too of 7.5%.
09 Jun 16
Small caps win dividend race
Dividend income typically comprises a substantial proportion of the total long-term return from equities. This will especially be the case at a time of low interest rates and low inflation/growth. A segmental analysis for 2013- 2016 shows that the further you go down the market-cap scale the more robust dividend growth, especially in the coming year. While there is the potential for short-term performance from “renting” some of the high yielders in the FTSE 100, overall there is better value to be had from a portfolio of good-quality smaller growth companies, some of which are also capable of delivering special dividends.
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28 Apr 16
5% upgrade to EPS forecasts over 3 years
We are upgrading our EPS forecasts by 5% over each of the next three years post yesterday’s H1 2016 numbers. Our price target moves from 206p to 215p (+11% upside), although we expect the share price to remain range bound in the near term given uncertainty around May Bank Holiday trading and, more importantly, the EU referendum.
13 Apr 16
Topic of the quarter: While the overall number of licensed premises in Britain has declined over the past five years, there has been a significant divergence in the fortunes of wet-led and dry-led outlets as a result of changing consumer trends, the smoking ban and an uneven playing field between pubs and supermarkets. Data for 2015, however, shows that pub closures may be bottoming and dry-led outlet growth slowing amidst a deterioration in the consumer outlook, rising costs amongst operators and excess capacity in the market. With total leisure spend per consumer coming under pressure, this report considers the major eating and drinking trends amongst three core consumer groups: 18-24 year olds (who are going out less and are more concerned about food than alcohol), 25-44 year olds (who comprise 30% of out-of-home occasions and eat and drink out more than most despite having school age children) and 55+ year olds (only 4% of whom eat out more than once a week and a third of whom had not been out for a drink within the past six months).
SCS CAKE PHTM RGD SHOE
08 Apr 16
Strong trading vs tough comps means significant upgrades today
In our recent commentary on ScS we have been flagging the combination of strong trading momentum, upside risk to conservative forecasts, and (special) dividend potential compared to an attractive valuation, which has weakened further in recent weeks. Today’s update confirms two of these dynamics, with guidance for the full year now to be significantly ahead of current market expectations. There may yet be scope for additional upgrades later in the year and the cal’16 P/E could be as low as c7x (<3x EV/EBITDA). The yield is over 9%. A compelling investment.
19 Jan 16
Sofa so good
We initiate with a price target of 206p (fair value of 192p plus 14p prospective dividend), which values ScS at 14.2x adjusted 12-month EPS (14.5p). Fair value is an 8% discount to DFS reflecting ScS’s recent history and lower relative sales density, margins and earnings growth outlook. While we recognise the recovery in the share price post the May profit warning, the importance of the festive trading period and the need for management to regain investor trust, our Buy recommendation reflects the yield underpin (currently 7.6% with headroom for growth, in our view), positive recent trading against tough comparatives, supportive macro conditions and top-line catalysts.
08 Dec 15
Risk is to upside given positive trading and operational gearing
ScS is trading well, with LFL orders up 7.9% YTD. If there was any residual doubt that the weak trading in Apr/May last financial year was market related it should be eliminated today. The current growth rate ought to spike up in H2 against an extremely soft comp, which consensus forecasts do not currently assume. Our analysis suggests scope for a 5% beat on LFLs which, given operational gearing, could deliver PBT well in excess of £10m. The risk is therefore very much to the upside. News of a new opening in H1 is also positive for next year. This update should therefore be well received and highlights a compelling entry point for investors on the current valuation.
18 Nov 15
Dotdigital Group (DOTD LN) Magento’s only global platinum marketing partner | Eckoh (ECK LN) In-line; Accretive deal supporting growth strategy | IFG Group (IFP LN) In-line, positive KPIs, Capita/Towry transactions complete | Informa (INF LN) Trading update | ScS Group (SCS LN) Risk is to upside given positive trading and operational gearing | Summit Therapeutics (SUMM LN) Extension of strategic alliance with the University of Oxford
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18 Nov 15
Income support – “the top ten”
Amid a background of uneven and subdued economic growth, persistent low interest rates and choppy financial markets, we posit the idea that “dividend surprise” may be a significant contributor to outperformance in the short to medium term. We have screened for particularly well-supported dividends, which has produced a list of 71 stocks. We then considered the wider fundamentals to arrive at a focus list of 10 companies, where we believe dividend surprise has a good chance of coming into play.
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09 Nov 15
Temporary setback in Spring provides interesting valuation
Apart from the setback in spring, the trends in order book growth have been positive and this is certainly true in the first 9 weeks of the new year (+13.3% LFL) albeit comps remain fairly tough for the rest of H1. Trading in the new HoF concessions and carpet departments appears to be gaining momentum, as does online performance. With data suggesting ScS did not lose share during the dip, the setback appears to be no more than a temporary setback. This therefore creates a potentially interesting window of opportunity for new investors given the valuation and yield.
29 Sep 15