After Crawshaw released their trading update on Friday (05/01/18).
Followers and shareholders were a little confused it the update was good or bad because the share price was positively higher in the morning before closing down by 10%.
My take on their Trading updates
Here is my commentary:
Off the bat, management has stated, “Sales driven by rollout of factory shop format.”
But the problem is: “Total group sales for the 15-week period increased by +0.6% versus the prior year.”
How are sales driven?
When you open 10 extra stores from last year, should we see sales growing more than 0.6%?
Unless Crawshaw manages to open their 10 new stores one month before releasing their trading update, I can sympathise. I’m the opening of new stores are spread out for the whole of last year.
Now for the like-for-like comparisons, management has said their new factory store format is helping to offset their “weaker” high-street store format.
Shouldn’t Crawshaw management start closing some of its “high-street” format?
Because LFL is down over 6% meaning once these stores are opened for the initial year, it doesn’t get repeated business for the following year!
Now, to compare this with their prior years trading update.
Crawshaw previous year trading update in brief
2017: Last year, they only cover 5 weeks to show group sales grew by 13% and LFL down by 3.8%. No mentioned of new stores opening figures.
2016: It stated that group sales were up 64% in the 15-week period versus the prior year. And LFL sales were up 0.8% versus the prior year. Mainly due to the increase of 17 stores for the current financial year taking our portfolio to 39 stores.
2015: This is a 9-week comparison with sales rising by 21%, but LFL sales fell by 3%. There is no mentioned of new stores opening.
With data stretching back to the beginning of 2015, this year trading update is the WORSE EVER!
More importantly, despite double-digit group sales growth, the business didn’t make any profit!
Since 2015, it made an accumulated net loss of £0.6m.
The minor “0.6% sales growth” this year should scare investors because net losses will be LARGER than expected!
Time will tell what kind of profit/loss would surmount as they report their full results in April this year.
Five Important observations of Crawshaw
So, what is the point of carrying when the probability of Crawshaw succeeding is probably less than 15%.
Regardless of its future success or failure, it is worth understanding the position that Crawshaw find itself.
Below is a list of five of the most important things we should pay attention to.
Here are five factors and the effect on its share price:
1). 2Sisters to the rescue
Crawshaw was desperate for funding and found a partner in 2Sisters, a fresh meat poultry suppliers.
The founder, Ranjit Boparan acquired £5.1m at 15.2 pence share giving 2Sisters 33.8m shares of Crawshaw equivalent to 30% of the business.
It values Crawshaw at £17m at the time.
The 33.8m shares are invested in Invest Co 1 Limited, a company owned by Ranjit.
Also, there is an additional 45.4m share exercisable at 15.2 pence, but this is subject to five consecutive days of the share price being above 40p per share.
What do investors need to know?
Ranjit can dump his 33.8m shares in the market but would be seen dilutive and he will probably lose 50% or more from his investment.
That’s because the “six-month lock-in” period has passed.
Given the poor trading update, it is unlikely that Crawshaw will rise above 40 pence per share between the first and second anniversary of Ranjit initial investment (April 2017).
The effect on share price
Ranjit has a net worth of over £500m, so a £2m loss is small change. But if Crawshaw were to need further funding, will Ranjit digs deeper into his pocket or cut his losses?
Since he controls 30% of the business, any dumping of Crawshaw shares will be a clear signal to other investors that the end is near.
And given Ranjit expertise and experience in this industry, most would follow his lead.
In that case, Crawshaw shares could half to 5p.
But, if Ranjit continues to fund Crawshaw, then the shares will stabilise around 8p-15p. It all depends on the level of valuation.
2). Negative Equity
Crawshaw boosts equity of £18m and it’s meaningless because of poor operational performance. In an event of a liquidation, the intangibles (£11m) are worthless.
Real equity is worth £7m or less.
But when liquidation does happen, the valuation tends to get crush and shareholders lose 100% of their original investment.
3). A constant cash burner
Last year it burned away £2m-£3m of cash.
Expect the cash burn to be greater this year.
This “cash burn” isn’t a one year or two-year event.
Important: Since 2002 they wasted £24m of investment. Unless Crawshaw changes their business model. Then shareholders should wave goodbye to their investment.
Some say cash burn is irrelevant because the business is expanding in the hope for higher future profits.
I suppose it’s true.
But if we exclude capital spending, Crawshaw is still making cash losses of £3.4m from 2002 onwards.
Unless they change their company’s name to resemble a “cryptocurrency” outlet like that ice tea company.
4). It’s not a PRICE-SETTER
A business can always make money if they are a price-setter. Crawshaw isn’t.
That’s because the big supermarkets dictate the price.
RULE: – When a business can’t set their price, they are a price follower. That means lower profit margins if any.
With these business characteristics, built into their business model, you can’t expect a high valuation.
Therefore, any rise in share price is unsustainable because once markets move against them the fundamentals of these businesses weaken and the share price gets exposed, much like Crawshaw!
5). Profits expectations are unlikely to be met
One broker is forecasting EBIT loss of £1.4m, the same as last year. With poor sales growth, investors could expect a heavier EBIT loss, unless management has prepared themselves for this moment and made some costs savings.
Unfortunately, there is no mentioned of any costs savings.
Conclusion: Crawshaw Group
You probably conclude that I’m super bearish from the facts, along with my interpretations.
And you are right.
The next six months could see the shares drift lower as cash balance dwindle away, much like the last 24 months.
The company has no real assets as most are leased from landlords. There are the supermarkets who have the financial power to break Crawshaw in price competitiveness.
This isn’t a good company to hold in your portfolio.
If you do decide to take a gamble, then it is purely speculative.
But it doesn’t mean you won’t make money because a “buyer” could come and buy Crawshaw, much like Slater and Gordon bought Quindell and took a massive write off!
Unless Ranjit has an ego the size of Antarctica and buys the business out for 25 pence per share, then my advice is to stay away from the share price.
Please comment below, if you have additional opinions or views that differ from my own.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.