Firstly, the company has continued to “experience lower revenues throughout the business, with sales of rare collectibles to high net worth clients being at a lower level than expected and trading being particularly difficult in the interiors division. Additionally, the integration of recent acquisitions has still not achieved the level of cost savings that is required and there has been continued investment in the online platform.”
The bottom line is that Stanley Gibbons is likely to report a loss before tax of £1m to £2m for the financial year to 31 March 2016. The company reported a profit before tax of £3.15m in the prior financial year, and reported a profit of £372,000 in the six months to end September so trading has deteriorated markedly since then. So, with the business moving into the red, and the board unable to turn inventories worth £55m on its last balance sheet into cash, this has meant that borrowings have risen sharply too. In fact, having seen net debt rise risen from £3.3m to £17m in the 12 months to end September 2015, it has increased again and the company’s gross indebtedness is likely to end next month at around £22.6m. In turn, without a capital raise there is no way that the company will be able to repay £6m of an additional overdraft facility which was made available by its bankers and is due for repayment on Thursday 31 March 2016.
As a result, the board has decided to raise £10m through an equity issue even though they clearly stated in a London Stock Exchange announcement on Wednesday 13 January 2016 that “although an equity fundraising is one option potentially available to the board, the discount to net asset value at which any such fundraising would likely be priced could make it a relatively unattractive route to alternatives under consideration”. It’s a distress fundraise as, prior to any capital raise, the company has around 48m shares in issue and net asset value of £81.9m, or 171p a share.
So, with the share price being marked down a further 33 per cent to 43p post the trading update this morning, any equity issue is going to be highly dilutive for existing shareholders. I outlined several alternative options available to the company in my article last month which would have avoided this scenario (‘Stanley Gibbons fundraise’, 14 January 2016). The fact that asset sales are not being considered either suggests an absence of buyers at sensible prices, or an unwillingness of the board to consider such options, neither of which can be viewed in a positive light.
Secondly, the company’s auditors Nexia Smith & Williamson have resigned “because they consider the risks and uncertainties associated with the audit to exceed the level that they are willing to accept”. They are not the only financial advisers departing the scene as Nomad and corporate broker Peel Hunt has been replaced with immediate effect by brokerage finnCap who have been appointed to the role.
Thirdly, although the company has identified £5m of cost savings on an annualised basis, we have been here before. The fact that previous cost savings have been identified, but not delivered does not inspire confidence.
Frankly, I have lost complete confidence in the board of Stanley Gibbons and their ability to navigate the business back to profitability and that’s after taking into account the appointment of financial adviser Evolution Securities China in the cost savings review. My major regret is that I didn’t take this action sooner, as my decision to give the management team the benefit of the doubt has proved costly. In the circumstances, and having maintained a hold recommendation on the shares at 73p in my 2015 Bargain shares updates article earlier this month, I am drawing a line under what has proved to be a poor recommendation. Sell.
Please note that I have published three columns today, all of which are available on my IC homepage and are also listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 77 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p (‘Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Mind + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: By at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term targte 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 42p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
