It’s official: drinks wholesaler Conviviality (CVR) has called in administrators. The news follows a dramatic few weeks for the company, which featured a shock profit warning, the apparent unearthing of an unexpected £30m tax bill, and subsequent failure to find the £125m it needed from investors to keep the business going.
Investors and analysts have been left scratching their heads asking what went wrong. We must include ourselves in this, having placed the shares on a long-term buy rating, although we weren’t alone: analysts at Shore Capital and Investec both reissued buy ratings on the stock just days before the initial warning, assured by management at the time of half-year results in January that all was well. It’s fair to say the recent turn of events has left plenty of investors fuming.
Chief executive Diana Hunter resigned from the business on 19 March, just 11 days after the profit warning.
A £30m share placing last December – completed to buy 127 Central Convenience stores from collapsed wholesale chain Palmer & Harvey – has been viewed in hindsight as an indication that cash flows were under pressure, although a net debt/cash profit ratio of 1.5, complemented by an interest cover multiple of 13 (as at the end of October) didn’t point to any undue financial distress.
The Palmer & Harvey deal may have had unintended consequences. The group’s transformation from a retailer to a wholesaler rebalanced the way its finances worked. Retailers receive money on site, but wholesalers invoice clients, which gives customers more time to pay. Referred to as ‘debtor days’, this ratio is used by auditors to work out how quickly a company receives cash from customers, rather than simply lodging the sale in the profit-and-loss statement.
As per Conviviality’s last set of annual results, current trade receivables rose by 45 per cent year on year and debtor days rose from 51 to 65. It’s generally accepted that a falling number of debtor days is desirable – it means the company is receiving cash more readily. True, there could be reasons for an expanding day count: long-term debtors could distort the ratio, longer debtor days could be used to attract new business, or the size of the business now allows for a more relaxed policy. But in some cases it’s indicative of a lack of adequate financial or credit controls. Ms Hunter admitted in March that there were errors in the company’s financial forecasts.
