St. Ives share price collapse: Is this the time to buy?

The dramatic decline in St. Ives share price makes for a good analysis.

And, what makes it good is the rapid change in its business cycle.

business-cycle

St. Ives is one of these businesses with a volatile earnings record (see graph 2). And this makes their share price movement interesting (see graph 10 and 11).

And that excite stock analysts (casual or seasoned) with one question: “Is this the time to take a punt on St. Ives?”

Obviously, this depends on your “time horizon”, “risk tolerance”, “expectation” and much more.  

 

The objective is to find businesses with temporary operational problems which can be amended. So, a recovery can ensue.

So, let’s begin.

 

Is This The Right Time to Invest in St. Ives?

Seeing a share price crash of 80% ‘magnitude’ in one year, you could be forgiven for catching this falling knife (if it works in your favour).

But catching a falling knife inhibits potential risk. The FT did a wonderful analysis post on the history of AIM.  One quote stands out: “Over the past 20 years, investors would have lost money in 72 percent of all the companies ever to have listed on Aim.”

So, this means you are likely to catch the knife’s tip, rather than its handle! Ouch!

However, St. Ives isn’t an AIM company because it was founded in 1964 meaning there is some history of success. At the moment, the business is struggling, if adversity is large enough, then a liquidation is likely. Now, we ask if this a temporary operational issue or a permanent decline?

 

Revenue declines and earnings volatility

 

Graph 1

For a long-time, St. Ives revenue been stagnating, if not declining.

St. Ives revenue

Unsurprisingly, the persistent fall and lack of recovery of its revenue put pressure on their bottom lines. So, it is causing margins volatility every two to three years.

Graph 2

St. Ives earnings

Profitability and capital ratios

So, how did this business fair when measured against its equity and invested capital?

 

Graph 3

st ives profitability ratios

Again, if you follow profits after tax, the troughs and peaks are telling.

What you should keep in mind is the slowdown of revenue, despite the big investment made. (More details further below.)

 

Graph 4

ST. IVES CAPITAL TURNOVER

The idea is the more you invest, you more extra revenue generated. With St. Ives, the declining capital turnover is suggesting the opposite. As titled on the graph, this ratio has been warning investors in advance that St. Ives is struggling to grow sales, in line with capital investment.  

You get the squeeze in margins leading to the current predicament of a crashing share price.

 

The buying and selling merchant

I say this with good reason because St. Ives has been disposing of their assets while acquiring new ones.

 

Graph 5

St. Ives disposals

Since 2002, the marketing firm disposed of assets worth £500m. The level of disposal is so high, causing the company’s tangible assets fell from £201m to £35.5m in the same period.

The accumulated disposal number shown in the cash flow statement adds up to £114m. Am no accountant, but does this represent a wide discrepancy?

When you see, the business is disposing assets at this rate, it doesn’t need to worry about maintenance costs because of cash inflow. 

You could be wondering how a business survives with so much disposal. Would revenue collapse? 

Bear in mind that depreciation and amortisation charge since 2002 is £341m. And St. Ives invested £477m to date. If you minus the depreciation + amortisation, St. Ives is left with net capex of £136m. Not enough to replace disposed assets!

P.S. Unless the assets acquired today is CHEAPER THAN the past. (Unlikely)

 

 

It does explain why tangible assets declined from £201m to £35.5m and explained the increase in goodwill (including other intangible assets) from £41m to £189m.

All we know is St. Ives loves to buy and sell assets frequently. And creating a credibility issue over their business model.

Or, has the company lost some sort of competitive advantage?

 

Why St. Ives Goodwill assets have value?

Most stock analysts jump to the conclusion that goodwill has no intrinsic value because it’s there to balance the balance sheet. 

By taking away goodwill from of total assets, it assumes the business has zero equity for shareholders. In that case, St. Ives recorded negative net tangible assets of £55m, as of 2016.

 

Please, explain graph 6 and 7:

Graph 6

St. Ives turnover

We know revenue been declining.

Profits margins are volatile.

But, how do you explain collapsing property, plant and equipment resulting in higher tangible asset turnover?

It doesn’t make sense, because if tangible assets are turning over faster, should St. Ives invest more in tangibles, due to its cash generative abilities?   

On the flip side…

Graph 7

St. Ives goodwill

St. Ives goodwill turnover is declining, but the business is investing more (known as overpaying for acquisitions).

This leads to a terminal decline in the ratio with the analysts wondering if St. Ives management knows how to run a business.

 

The logical conclusion is either there is an overvaluation of St. Ives goodwill.

Or, is there a big undervaluation of its tangible assets?

We can assume St. Ives understated its tangible assets by shifting some of its tangible assets value into its goodwill assets. If you add up goodwill and tangible assets together we get this:

Graph 8

St. Ives non current asset turnover

And that is a more believable chart showing a steady fall in the ratio.

 

St. Ives, the business and latest operational performance

Before we talk about their latest results. You need to know each of St. Ives divisions and revenue source from the following subsidiaries:

     Strategic   MarketingMarketing ActivationBooks
DataDigitalInsight
OccamAmazeInciteService GraphicsClays
Response OneReauseHive GroupSIMS
Branded 3PragmaSP
SolsticeFSPTactical Solutions
The app business
Revenue (£m)Revenue (£m)Revenue (£m)Revenue (£m)Revenue (£m)
36.271.236.7154.868.6
% of group revenue % of group revenue% of group revenue% of group revenue% of group revenue
9.919.41042.118.6

 

The dark orange words are St. Ives subsidiaries.

 

On 25th April 2016, St. Ives put out a trading statement stating: “Group revenue running approximately 5% ahead of the equivalent period last year.  However, the outlook for the final quarter, and for the following financial year, has deteriorated.”

The shares collapsed by 41% on that update!

On 11th August 2016, another update reads: “The board reports that the overall results for the year are expected to be in line with current market expectations.

The shares rose by 25% from that statement.

On 19th January 2017, this update reconfirms the slowdown: “As a result of the above, the Board now anticipates that the out-turn for the full financial year will be materially below its previous expectations with the majority of the shortfall due to the pressures within the Marketing Activation segment.”

The shares took a nosedive of 40% in a single day.

 

So, when they released their interim results, four things stood out:

  1.  Trade receivables and payables grew by £10m each, compared with the same period last year.
  2.  Impairment charges made amounted to £36.324m or 15% of total non-current assets.
  3.  Net Operating Cash Flow is £18.9m, doubled from the same period last year.
  4.  No capex was made in the first half.

These four points aren’t randomly selected, there are connections relating to one another.

Have you spotted the connections?  

If not, here is the explanation below:

Higher receivables, this helped to boost revenue, while cushioning a large impairment charge. The larger impairment charge could lead to a lower impairment charge at the year-end.  

But, St. Ives made no capital investment, so maintaining its dividends.

 

Now, we ask, is there value in St. Ives?

 

 

Market Valuation of St. Ives

Before you answer this question, let’s us look at the changes in St. Ives market values.

 

Graph 9

 st ives market valuation

Currently, St. Ives’s valuation is driven back to the dark days of the financial crisis with a market value of £75m.

People questioning St. Ives debt liabilities make the valuation looks heftier at £146m.

Note: St. Ives market values, based on the average share price for each year, except for the “latest”.

Using the ‘average’ share price doesn’t tell the whole story of St. Ives market performance.

Below is the change in St. Ives historical share price, if you measure it in percentage terms.

 

Graph 10

 St. Ives share price gains and losses

Since 2002, there have been 15 occasions where the share price movement is greater than 20% in either direction. It makes for a trader dream if you know how to get in and out of St. Ives (Very unlikely, but not impossible)! At best, you can manage to put on four or five winning trades.

The latest big decline of -67% is intriguing because the technical chart set-up shows a strong buy signal, courtesy of the divergence-convergence phenomenon.    

Below, you will read about the fundamental valuation and a technical analysis perspective.

 

On a historical perspective, how do St. Ives’s fundamentals compare with its historical market valuation?

 st ives market valuation table

P.S. Ignoring price and EV to earnings ratios.

Today, St. Ives is 72.2% overvalue, based on traditional market valuation metrics when compared to 2009.

Why have I chosen 2009’s results, as a comparison? 

It is the only other time when St. Ives incurred a net loss.

This time the situation is worsening because 2017, with 2016, it could report two years of losses.

P.S. Half-year results saw them report a net loss of £26.8m, so for 2017, the full-year would see a similar size loss.

And this put a spanner for any sustainable or meaningful share price recovery because the fundamentals are still weak. Also, net debt in 2009 is substantially lower (£19m) than today (£81m).  Adding further financial risks.

 

 

Technical charts of St. Ives

We begin with the weekly chart dating back to 2004.

 st ives weekly stock chart

Given the pattern setup, these shares could bounce back because of the divergence-convergence continuum.

The pattern signal is very strong.

 

The monthly chart of St. Ives.

 St. Ive. monthly chart pattern

We can identify the technical pattern when St. Ives start selling off at its peak (SEE 2016 period) because both the MACD and RSI made lower highs.

But, is this pattern showing buy signal or neutral?

Give me your expertise in the comments below.

 

Final Thoughts

Sticking with the technical analysis, the weekly chart shows a strong set-up for a price rise.

In my opinion, that price rise could be a quick recovery to the £0.80/.90 region, before hovering at that range. But you need to do more research.

Why not higher?

Even with the share price crashing, St. Ives shows overvaluation. Also, just because the share price is low doesn’t mean it’s cheap, you need to account for the number of shares in issue and the increase in debt.

Finally, 2017 looks likely to be another loss-making year, which makes it two years in a row!

 

Away from valuation, my main concern is the decline in freehold properties from £55.3m in 2001 to £13.3m. As debt is close to all-time highs, the banks would feel concern about lending to a business, if further losses persist.

So, this leads to the risk of a dividend cut to conserve cash. And given the declining share price, it wouldn’t surprise people if management were to go down that route.

It leads me to predict the medium-term (1-2 years) share price forecast could mean a target price in the 30s/40s.

 

Call to Action

What do you think of this analysis of St. Ives?

Is there something left in this business? 

 

Disclosure

The opinions are expressed independently by the writer. It is for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

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