Sales at Findel PLC rose by 6.1%, helped by like-for-like sales increase of 15% from their biggest division Express Gift, although Findel Education let the company down with LFL of -6.9%.
Findel share price is up 30% With market capitalization, down by 70% from 2007’s peak, is this the turning point for Findel PLC?
To understand Findel Business fully, it is helpful to have a brief knowledge of the company. To do this we must analyse the following:
1). Share price history;
2). Business model;
3). Address the change in their intangibles and effects it had on profits and shareholders’ equity;
4). The potential for a recovery.
Brief Look at Findel PLC
Findel PLC is a retailer and distributor, handling and supplying specialist products manufactured by third parties. It provides credit to customers and businesses for an extended period to buy their goods and services.
Addressing Findel PLC share price
Findel did grow their share price to £100 per share. The banking crisis and consumer tightening saw the shares fell to as low as 44 pence. Also, we mustn’t forget the company did raise £150m in 2010 and 2011 causing the number of shares outstanding to grow by 9.5 times.
So, on an adjusted basis, Findel shares reach a low of £5.
If we look at Findel’s market capitalisation, it fell to £134m, but today’s rise sees market value rose to £164m, still a 75% decline of £850m in 2007. Enterprise value stands at £420m.
Findel Business Model acts as a “subprime” credit lender to consumers
Findel lends money on credit for customers to make purchases from their catalogue of third party suppliers. However, credit quality is of a low nature.
That’s because the level of doubtful debt reported in receivables.
Findel’s reports doubtful debt averaging 30% to gross receivables since 2003 with the latest coming in at 28%.
Doubtful debt consumes 18% of total sales in 2017. But bad debt expense in 2017 amounts to £35m or 7.3% of sales. This improved further, as the interim report states bad debt of £10m vs. £16m in the previous year.
The question investors are asking is: Will Findel continue to improve its trading performance and credit quality?
My analysis sees that Findel is generously extending credit far too long, although this has shortened in recent years. Taking Findel’s gross receivables and measuring it against sales, in 2017 it accounts for 64%.
64% of 365 days is 233 days of credit, down from 300 days of credit in 2015.
Findel Intangible writedowns causing Shareholders’ Equity to fall
Findel was leveraging its business before the financial crisis halted the company expansion. During the period of expansion, Findel’s intangible rose from £40.4m in 2003 to £151.4m by 2008. Then came the long decline as intangibles drop to £26.2m.
Changes in Findel had a significant effect on both the company’s shareholders’ equity and net profit. We can show this effect by calculating two averages:
Starting with their shareholders’ equity, the fall in shareholders’ equity is less pronounced because during 2010 and 2011 the company raised £150m in equity, which helped to stabilised equity for a while. To counter the impairment of intangible assets, they used the cash to repay some of their debt as net borrowings fell from £376m to £227m.
Despite this effort, shareholders’ equity fell to £16m, if we deduct intangibles, then Findel has a negative equity of minus £10m vs. 2016’s positive equity of £32m.
When it came to net profit, the impairments had a profound effect, and the difference between the two periods is £46m. However, how much of this is down to poor trading between the two periods?
One way to find out is to average net cash profit in the cash flow statement (impairment charge gets added back since it is a non-cash item). And the result is amazing because before impairments (2003-2008) average net cash profit is £6.5m. After impairments (2009-2017) average net cash profit is £6.3m.
This is an interesting finding because whether the economy is going through a boom or bust period Findel will always be a poor business.
Debt is a problem when the company not reporting profits
Given that group operating profit is £16m, we shouldn’t forget about its debts. Findel debt facilities are maturing in 2019, so it would be a good time to report a turnaround.
And since they lived with high debt for a long time, I don’t it see being an issue yet.
Is there potential for Findel to recover?
With intangibles standing at £26m, some would say the company would stop impairing their assets and start to report a profit.
Although it did report a profit, Findel can still report charges to their business. Charges like:
1). Bad debt from receivables;
2). Lease provisions;
3). Refund charge for customers;
4). Disposable charge from selling their assets;
5). And many more.
In fact, last year it made £21m in impairment charges to goodwill and intangible that is 23% of all total charge items, otherwise known as “Individually significant items.”
With low intangible assets, Findel could report higher profits or reduced losses in the future.
Final Thoughts: Findel PLC
Despite their positive interim results, I wouldn’t be holding the shares for a long period because of Findel inconsistent performance. Maybe this could be a turning point for the company, but the nature of its business makes it high risk for conservative investors looking for stability.
However, brokers are reporting 20 pence EPS for the next three years. That is a forward-PE ratio of 9 times earnings to the current share price.
The share price is fairly valued and could rise to £2.50 in the near term.
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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.