Warpaint has issued a brief, but positive, update alongside its AGM today. Sales have been at a higher level than anticipated in H1, albeit significantly below the prior year due to the pandemic. In line with management’s original ambitions, there has been an improvement in gross margin. Together with lower costs, which the furlough scheme has contributed towards, this has helped the group deliver a positive EBITDA in the half, with no erosion of cash. This is a good outcome and ahead of general market expectations, we believe, albeit there is no guidance or consensus for the year ahead.
Companies: Warpaint London
Warpaint has announced another exciting new contract win with a large national retailer. The new agreement is with Wilko which, from mid-September, will stock about 100 exclusive Body Collection branded products which will be stocked in 355 UK stores, and over 115 Technic branded products which will be stocked in 189 UK stores. Warpaint’s brands will be merchandised on bespoke display stands in prime locations in the stores, and will also be sold online through Wilko’s website. In addition, it is envisaged that a range of Technic and Body Collection gift sets will also be stocked in stores for the Christmas shopping period. This is excellent news and should be well received by the market.
Consistent with most consumer businesses, Warpaint anticipates a significant fall in sales this year and has withdrawn guidance. However, it has taken action on costs using all available internal and external support mechanisms and the board believes it has the financial strength to withstand disruption until “at least the end of 2020” without needing any additional debt financing; on 08 April it had £3.3m cash and c£0.5m debt. As we noted 3 weeks ago, Warpaint looks capable of breaking-even in 2020 even if sales fell to c£30m (-40%) which appears to be an extreme scenario. The group is well placed to benefit from any improvement in conditions and there remains a big window of opportunity to complete/fulfil customer orders for the important gifting segment later in the year should COVID19 restrictions ease.
Consistent with other consumer businesses, Warpaint has issued a statement indicating that the impact from COVID-19 to date has been limited. However, response to the outbreak across its target markets means there will inevitably be a negative impact on business performance in the months ahead, albeit unquantifiable at this this stage. More details are likely to be provided at the prelims on 22 April. There remains a significant window of opportunity post COVID-19 to complete and fulfil customer orders in the important gifting segment later in the year though, and the balance sheet is strong with net cash, particularly at this time of year. The business should therefore be able to weather the storm.
Today’s full year update contains 3 key news items which the market is likely to find reassuring. 1) Adj PBT in 2019 will be within the range of guidance and slightly above our downgraded forecast, 2) a new distribution agreement has been signed with a leading supermarket chain in the UK, and detailed discussions are ongoing with several other large UK retailers, and 3) specialist consultants have been contracted to accelerate the process of expanding retail distribution in the UK and US. Against forecasts that were rebased over the last 15 months, the prospect of wider distribution and operationally geared growth ought to be well received. Results will be announced in April.
Management is pleased with the overall trading performance since the last update, which has been in line with expectations. However, FX volatility has had an impact on full year profit guidance through translation and margin. Full year PBT guidance is now £5.1-5.5m as a result, equating to an 8-15% downgrade versus our prior £6m forecast. We have prudently downgraded to the bottom of that range and rippled that through to FY20. However, strategic plans to broaden distribution, both in the UK and oversees, continue to advance and operational changes in the US, although delayed, are now back on track. Outer year forecast changes therefore appear on the conservative side.
The Global Sustainable Farmland Income Trust will invest in a diversified portfolio of operational farmland assets located in major agricultural markets including the United States, Europe, New Zealand, Australia and certain countries within Latin and South America. Raising up to $300m. Due 28 February
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The trade-off in the risk/reward for gold and gold mining equities is improving, as central banks push the current iteration of the post-World War II Bretton Woods financial order towards its limits.
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Since their privatisation in 1989, the 10 water companies have faced a periodic review every five years; it is undertaken by Ofwat, and prescribes customer prices, along with the investment requirements. As part of the ongoing review, PR19, Ofwat will publish its Final Determination numbers on 11 December 2019; they will apply as from April 2020, although water companies do have the option to seek a reference to the CMA.
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Warpaint’s exposure to UK headwinds was amplified by an over-reliance on small high street retailers. This and the demise of other customers is the main reason for downgrades over the last year. Management has drawn on its experience though and responded with a clear strategy to restore growth. Wider brand distribution to bigger retailers, especially in the UK, will be a key driver. We factor little in from the initiatives at this stage, but the TSR is still 55% at our 76p fair value estimate. This could rise to 160p in 2 years on good execution.
Warpaint London's strategy is to provide customers with access to an extensive range of high-quality and affordable cosmetics. Its focus has been to develop its flagship brand, W7, while capitalising on the growth potential of e-commerce and international expansion. The UK retail environment remains challenging; while Warpaint continues to grow well in the more successful retailers, growth is being hampered by a significant tail of customers ceasing to trade. As ever, results are heavily skewed towards H2: the order book is currently looking solid, but the UK consumer outlook is subdued, and the next few weeks are likely to shape the financial performance for the whole year.
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The introduction of IFRS 2 in 2004 generated considerable debate about the best approach for handling ‘share-based payments’ (SBP). While it is clearly a cost to shareholders, which should be included in the statutory reporting lines through the P&L account, the question arose as to whetherit should be part of our underlying EBIT calculation.
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When advisers first start looking at business relief (BR) products, there is much to take in: the rules governing such products; the investment strategies being used; and what the investment risk is. It is easy to lose sight of the fact that, for non-AIM products, the investment is being made directly into a company or partnership, rather than a fund. It is, therefore, essential that governance is part of the diligence process.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Full year results slightly ahead; improving trend in trading since April
Walker Greenbank is a higher end interior furnishings business with well-established global brand names and manufacturing facilities in the UK. The Group has this morning released full year results to 31 January 2020, slightly ahead of our forecasts at the PBT and EPS levels. During the year, and against what was already a challenging wider market backdrop, brands such as Morris & Co as well as the group's core licensing revenue stream largely offset wider weakness in the UK and US markets. As would be expected, trading since year-end has been extremely difficult, with product sales c.35% down in the first five months of the current financial year. Encouragingly, product sales in the last four weeks are reported to have been 31% below the comparative period, reflecting a steadily improving trend since the beginning of April. At this stage we leave our forecasts under review but it is encouraging to see the more recent improvement in trading patterns, whilst internal actions and the refocused strategy continue to improve the outlook for the group.
Companies: Walker Greenbank
The ongoing pandemic only serves to underline business models that are robust, and those that aren’t. This morning’s trading update from UPGS puts them firmly in the winners’ category. As the company approaches the final weeks of FY2020, it not only reports “better than expected progress” against an uncertain business backdrop, but also that revenue and key profit measures for the year should be ahead of current market expectations. Furthermore, online as a portion of total business should record a fourth consecutive increase, providing additional flexibility and strength in the case of a second wave.
Companies: Up Global Sourcing
UPGS released an unscheduled trading statement this morning which confirms better than expected numbers for FY2020 sales revenue, profitability, and net debt. A more encouraging outcome than previously envisaged when the company reported its interim results on 30th April.
Two of the pivotal issues flagged in recent research have now been firmly addressed. Gross margin gains & cost efficiencies have been stronger + quicker than expected, driving a record EBITDA margin in H2 (7.2%, +500bps). Capacity has also been created, which will supports future growth with only modest further investment. At the same time G4M has pivoted from cash burn to cash generation. After a strong start to FY21, helped in part by lock-down, and with last year’s initiatives yet to annualise, confidence is running high. Valuation is extremely undemanding for this growth play.
AGM statement: upbeat
Companies: Sumo Group
Walker Greenbank has a tangible strategic impetus under its new management team with a clear business model migration plan. While COVID-19 related market effects are affecting near-term trading – and the decision not to pay an FY20 final dividend – they are also presenting opportunities. Our estimates remain suspended for now ahead of the AGM on 29 July when an update on trading and the financial position can be expected.
Games Workshop’s (GAW) interim results are ahead of expectations. The highest rates of revenue growth were achieved in the channels with the highest operating margins, ie Trade (40% margin) and Online (64% margin). This has produced a strong improvement in free cash flow generation and ROCE has improved from 96% to 111%. We upgrade our forecasts for FY20 and FY21 by a further 3% following the 9% upgrade in November. Our DCF-based valuation increases by 11% to 5,748p.
Companies: Games Workshop Group
Red Dwarf, the very British sci-fi comedy franchise, ran for 11 seasons – most recently in 2017; and The Promised Land is a feature-length TV movie – out this year. Yes, the programme is an acquired taste. Strangely, too, many episodes are impacted by a virus or three (physiological, not main-frame).
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Gear4music’s FY2020 results reflect the positive momentum of the company’s announcements so far this calendar year. The data re-confirm brisk sales growth but in our view improved profits and profitability is the salient story. Moreover, with an online distribution focus, a well sourced product range and clear evidence that its logistics are being run more efficiently, the company’s ability to deliver positive newsflow looks increasingly sustainable. FY2021 started on an exceptionally strong note.
Autins has reported interim results consistent with its trading and COVID update at the end of March 2020. The first five months performance was ahead of management expectations and Q2 saw the Group achieve the majority of its targeted £2m p.a. cost savings, materially lowering the Group’s breakeven point. Automotive deliveries have restarted after a significant fall off in demand - all Autins’ sites were closed on 22nd March 2020 - and with PPE equipment orders building, 50% of the workforce has returned. The term sheet for a £2.75m CBILS loan has been agreed and the Group’s modelling of potential downside scenarios, including £1m of permanent liquidity headroom, shows that Autins could withstand an extended downturn along with the impact of other identified risks. The Group’s liquidity headroom looks to have improved further with the extension of UK & overseas support schemes, growing PPE sales and current trading volumes ahead of its downside scenario. Guidance remains withdrawn with FY2020 results set to be impacted by a significant reduction in H2 revenue. Nevertheless, with costs reduced and an opportunity pipeline of over £40m (incl. Neptune £30m) and a building conversion rate, Autins is now positioned to deliver a strong recovery in profitability.
Companies: Autins Group
We are introducing our Best Ideas for 2019 and also review the performance of last year’s picks. We suggest ten solidly financed stocks with good business dynamics that ought to be considered for core portfolio holdings and six UK domestically focused stocks that our analysts believe should perform strongly in the event that uncertainties unwind. We also introduce a new style of research from N+1 Singer which presents a Company’s dynamics and metrics in a clear and concise manner and concentrates on the pivotal issues affecting that Company and an investment decision.
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Warren Buffett once said that as an investor, it is wise to be ‘fearful when others are greedy and greedy when others are fearful’. Fear is not in short supply right now.
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COVID-19 update: div. suspended, expect downturn in orders
Companies: Headlam Group
Ubisoft’s FY19-20 revenue was hit by the bad reception of the supposed-to-be outstanding Ghost Recon Breakpoint. This led to a loss despite lower marketing costs (due to delayed games). Conversely, ‘Player Recurrent Investment’ (PRI) and Mobile gaming experienced solid progress. With 5-AAA games in the FY 20-21 pipeline, a revenue boost is expected from the hugely popular franchises that back these games.
Companies: Ubisoft Entertainment