If you're looking for income, you might want to consider furnishing your portfolio with a few shares in ScS Group (ScS). This purveyor of sofas and flooring, which operates nearly 100 stores nationwide, is new to the London Stock Exchange, having listed in January at 175p. It's enjoying a tailwind from the cyclical upswing in the housing and improving consumer credit market. What's more, thanks to a highly cash-generative operating model, the shares promise to pay a 7 per cent yield while the company continues to pursue growth.
- Generous yield
- Cash-rich
- Cyclical upswing
- Low rating
- Broadening appeal
- Interest rate rise risk
- House of Fraser roll-out risk
ScS has certainly made a comeback. In 2008 it was bought out by private equity firm Sun Capital for just £1. At the time, the retailer was in a real jam. The financial crisis caused the housing market to collapse and consumer confidence plummeted. And the freezing over of the consumer credit market proved a lethal blow for a company that sells most of its goods on tick. Moreover, credit insurance was withdrawn as the economy flat-lined. Since most of ScS's suppliers were using invoice discounting to fund working capital, they couldn't operate without credit insurance. But now, things look different.
The housing market has bounced back, the economy is improving, wages are rising in real terms and lending conditions are improving. This upswing helped like-for-like sales to grow 8 per cent in the first-half. The group also has a cash-rich balance sheet following its £35.7m IPO fund-raising and Sun Capital has poured money into the business, minimising the need for future capital expenditure.
That's all good news which underpins the bumper dividend prospects, as does ScS's highly cash-generative business model, which operates with negative working capital. It works like this: items are made to order - so the group holds minimal stock - and customers pay upfront - so cash is received before suppliers are paid. At the half-year stage £60m of trade payables compared with just £20m of inventories. Most of the goods are sold on credit provided through third-party lenders that assume the risk of default. So when trading is going well, cash generation is very strong, supporting a forecast 6.9 per cent payout this year, rising to 7.3 per cent in 2016.
| SCS GROUP (SCS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 203p | MARKET VALUE: | £81m | |
| TOUCH: | 200-205p | 12-MONTH HIGH: | 230p | LOW: 187p |
| FORWARD DIVIDEND YIELD: | 7.3% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 46p | NET CASH: | £26.6m | |
| Year to 28 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 208 | -2.4 | na | na |
| 2013 | 246 | 3.4 | na | na |
| 2014 | 258 | 7.2 | 14.9 | na |
| 2015* | 299 | 10.1 | 19.1 | 14.0 |
| 2016* | 318 | 11.7 | 22.3 | 14.9 |
| % change | +6 | +16 | +17 | +6 |
Normal market size: 1,000 Matched bargain trading Beta: -0.69 *Investec forecasts | ||||
There's a growth element to ScS as well. ScS wants to widen its 8 per cent slice of the £3bn furniture market by opening stores and broadening the product range to appeal to a wider, more upmarket demographic. It has already introduced new brands, including Parker Knoll, and in 2012 launched a floorings business. In July, ScS opened 30 concessions in House of Fraser stores - a cheap way to get exposure to the high street. ScS's HoF business is loss-making and there is the risk that it fails to gain traction. The other big bear point is the potential for a faster and a higher-than-expected rise in interest rates to hurt the business.
