Of course, the reason why the shares are now trading on a 65 per cent discount to book value of 171p, having fallen by a further third since the start of this year, and have proved a major drag on the performance of my 2015 Bargain share portfolio, is because trading has deteriorated and the company is sitting on stocks worth £55m, or double its market value of £27.3m. These inventories are made up of rare coins worth £8m, other collectibles including antiques worth £8m, and £39m of stamps. The fact that a fundraising is even being considered reflects the important point that borrowings are funding high levels of stock that have to be shifted to generate the much needed cash flow to pay down borrowings.
In my view, one fundraising option would be to dispose of some of the company’s inventories at a significant discount to their book value, potentially a sale of valuable coins or rare stamps to a large investor, with an option for Stanley Gibbons to buy the stock back at a predetermined price in the future when trading improves. This way the sale would provide both the investor with capital upside, and an exit strategy, but also giving Stanley Gibbons the scope to recoup some of the lost value on the inventory sold sometime in the future.
Alternative fundraising options
In terms of other potential fundraising options, it’s necessary to consider the other assets of the company which include goodwill of £39.2m on prior acquisitions, accounting for almost half of net assets. A large part of the goodwill relates to the acquisition of Noble Investments, acquired for £45m just over two years ago, a deal funded by a £40m placing at 295p a share. Noble comprises Baldwin's (the globally respected brand in coins, established in 1872), Dreweatts (an auctioneer of antiques and collectibles such as watches, fine wine and jewellery, established in 1759), Bloomsbury (a leading auctioneer of books, manuscripts and art) and Apex Philatelics. These businesses have performed relatively well: Noble's rare coin division generated interim trading profits of £1.7m for Stanley Gibbons in the six months to end September 2015, and Dreweatt contributed a further £400,000, profitability which is supportive of the price paid which is now 50 per cent more than Stanley Gibbon’s own market value. So there is value to be realised in these businesses if they are put up for sale. That’s not to say that the board will go down this particular route, but it’s one that should definitely be open for careful consideration.
Another option is to simply increase the company’s banking facilities, although shareholders would undoubtedly prefer to pay down, rather than increase the level of borrowings. It could be expensive too and higher debt levels increase investment risk for shareholders. An issue of convertible unsecured loan stock where the conversion price is substantially above the current share price is an option too, although the coupon could be high given Stanley Gibbons’ predicament. Also, it would be dilutive to existing shareholder interests unless the conversion price is close to net asset value of 171p.
Another fundraise option worth considering is an issue of zero dividend preference shares, the proceeds of which could be used to pay down bank debt. One of my top stock picks, Aim-traded housebuilder and brownfield land developer Inland (INL: 85p), has used this method of financing to great effect, the major difference being that Inland’s trading is robust and assets owned, mainly land, are more easily realisable which in turn offers holders of the zero’s reassurance they will get their money back.
Ultimately, it’s the duty of Stanley Gibbons’ board to refinance the company to minimise dilution to the interests of existing shareholders which is why it’s considering other options apart from a straight forward equity raise. In my view, the best way of doing this would be to either sell some of its crown jewels and valuable inventories as I have outlined above. Shareholders can expect news on the proposed fundraise before the end of March. Given the distressed valuation the shares are now priced at, I would recommend holding on ahead of that announcement. That’s because if a dilutive equity fundraise can be avoided, and clearly the board are considering all possible options, then I would expect a sharp rally in the share price as the distress risk embedded in the share price dissipates. Hold.
Finally, I have published three investment columns today, and articles on 29 small-cap companies on my watchlist since the start of last week, all of which are available on my IC home page and are also listed in chronological order below.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies since the start of last week:
■ 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 January 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p (‘Tech watch, 13 January 2015)
■ Trakm8: Buy at 300p, new target 400p (‘Tech watch, 13 January 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p (‘Amino has the ammunition’, 14 January 2015)
■ easyHotels: Buy at 89p, initial target 100p (‘easyHotels ramps up expansion’, 14 January 2015)
■ Stanley Gibbons: Hold at 58p (‘Stanley Gibbons fundraise’, 14 January 2015)
■ 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
