Shopping for a bargain buy

The record performance more than justifies including the shares, at 165p, in my market-beating 2019 Bargain Share portfolio. However, having hit a record high of 260p in January, the shares have given back the gains as investors readjusted their future expectations due to the UK lockdown and general economic uncertainty. Ramsdens closed all its 159 stores on 23 March, and furloughed 700 staff.

Fortunately, the group has a robust balance sheet, a key bull point in my investment case, ending the financial year with net funds of £11.1m (38p a share) and has access to an untapped credit facility of £10m, so has been able to comfortably cover a monthly cash outflow of £1m since the lockdown started. Moreover, the directors have bolstered the cash position by realising £2m of cash by scrapping gold stock at a decent profit, and converted £1m of foreign currency into cash, too. Also, finance director Martin Clyburn is budgeting to recoup around £3m of the group’s wage bill from the UK Government’s Coronavirus Job Retention Scheme.

Of far more importance is the trading outlook when a third of the stores reopen their doors by mid-June. One potential beneficiary will be the pawnbroking business (accounting for a quarter of gross profit) which can provide short-term relief to cash-strapped, but asset-rich customers who may decide to pledge their gold and jewellery. Their assets are worth more now, as the sterling gold price has been on a tear, rising by 39 per cent in the past 12 months. The buoyant gold price is likely to benefit precious metal buying and selling activities, too, a segment accounting for a fifth of gross profit.

Interestingly, chief executive Peter Kenyon says that online jewellery sales have been “very positive since the lockdown”, perhaps an indication of the ongoing underlying demand that resulted in a divisional double-digit profit increase in the past 12 months.

Of course, foreign exchange volumes, a segment accounting for 37 per cent of gross profit, will be subdued until holidaymakers are able to board planes again, but Mr Kenyon’s view is that “there will be less competition, we will take market share and earn a greater margin”. He has a point as the former Thomas Cook stores acquired by Hays Travel last autumn don’t offer currency exchange and Hays certainly doesn’t have the cash to do so now. Independents don’t have deep pockets either, he adds.

Analysts estimate too light

Although management guidance has been withdrawn, Liberum Capital has made a stab at forecasts, predicting a pre-tax profit of £3.9m and EPS of 9.8p in the 2021 financial year. I think that’s way too conservative for multiple reasons.

Firstly, 47 stores have a break or lease expiry in the next 12 months. Mr Kenyon is negotiating some hefty rent reductions, having just agreed a 46 per cent rent cut on a Hartlepool store, and a 25 per cent reduction in Elgin. It’s in a strong bargaining position.

Secondly, even if jewellery sales soften, then Ramsdens can easily sell gold stock purchased from consumers for scrap to keep profits rolling in.

Thirdly, pledge book lending is at “60 per cent or less of the gold price”, so there is an incentive in a rising gold price environment for existing pledges to be redeemed so that customers retain ownership of their assets, while at the same time attracting new customers requiring a cash advance. That’s positive for interest income and the quality of the lending book, too.

Fourthly, Ramsdens is well positioned to take market share from distressed operators in foreign currency exchange, and has ample balance sheet funding to exploit acquisition opportunities in pawnbroking, too.

So, although earnings for the coming year will fall short of the 2019-20 record performance due to the Covid-19-induced disruptions, Ramdens’ business is far more resilient than Liberum's estimates suggest. That’s simply not being priced in, with the shares trading on five times cash-adjusted earnings based on the 2019-20 results, and 11 times Liberum’s low-ball estimates for the coming year. Buy.

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.