Today, it’s a short stock report. I’m covering Bloomsbury Publishing and Gear4music. Companies’ news, I won’t be covering today includes:
1). A 10% fall in pre-tax profits at Costa Coffee has harmed owner Whitbread, which is seeing their share price fell by 5%.
2). Carpetright saw LFL sales rose by 0.8% as it made a net reduction of seven stores. Meanwhile, Group sales rose by 1.8%. In Europe, LFL sales rose by 6.3% and this is helped by the weaker pound.
Share Price: £1.64 (up 1.7%)
Bloomsbury is known for publishing the Harry Potter series, as well as selling academic books and adult titles.
The interim result is their weakest half, but today results look impressive with double-digit gains in revenue.
In fact, interim revenue has jumped from £46m in 2014 to £72m, a magnificent achievement. But, sometimes margins are more important than sales growth.
Their interim operating profit is £1.6m and has broken the million-pound mark for a very long time. For the sake of comparison, their full-year result saw operating profit at £9.4m. Any analyst worth their salt would have compared first-half profits with second-half. The conclusion is the second-half tends to produce nine times the operating profit.
So, expect the full-year to see a larger operating profit. Somewhere around £11m-£12m is expected!
The children division is their biggest division and contributes 40% of revenue. The Harry Potter series grew by 33%.
Their adult division accounts for 20% and revenue fell slightly, caused by a 10% fall in eBook sales.
Meanwhile, their Academic & Professional division saw flat growth with revenue at £16.6m.
The biggest improvement is the build-up of their cash balance from £9m to £17m. It has a minimal pension deficit of £251k and no debt.
Also, Bloomsbury has £10m to £14m in undrawn loan facility.
Cash Flow Statement
Cash flow from operations dipped from £5.6m to £3.2m due to income tax paid (£1.7m vs. zero last year). Also, both the receivables and payables saw unfavourable movements (i.e. more outflows).
But, if we ignore changes to working capital, then cash profit is higher by £1.6m to £3.9m.
A new Harry Potter book is coming out next year in October 2018.
Bloomsbury has been riding the success of the Harry Potter series, so whenever Harry Potter didn’t come out, sales at Bloomsbury took a dip. Notably in 2006, 2008, 2009 and 2010. The biggest sales drop is between 2007 and 2008 when it fell from £150m to £100m. That’s because JK Rowling released her last book of the series in 2007.
Despite the success of Harry Potter and owning lots of titles, Bloomsbury struggles to maintain their profit margin. Because the world of Kindle and iPad has made it convenient to purchase books at a much lower price. They are trying to address the digital challenge, but that division accounts for less than 20% of group sales.
Below you see Bloomsbury Publishing falling EBIT margin, using a 3-year average.
You can tell when the Harry Potter books were released by the chart.
And this translates perfectly to falling profits (using 3-yr ave.) causing a fall in market capitalisation, even though turnover was rising.
Bloomsbury has zero debt, but net funds have declined from the heydeys of Harry Potter (see below).
But net funds looked to be recovering and is stabilising the share price.
During the early 2000s, Bloomsbury has a market value close to £200m-£250m. Now, it’s half that. At one point, the company was fetching for £50m, valuing it a PER of 9 and EV/EBIT of 6.5.
Today, PER is around 13 times.
Brokers are forecasting EPS to return to 15 pence by 2020, but I suspect this is conservative given the good performance in their interim results. It wouldn’t surprise me if 15 pence will be met this year.
After some analysis, I have concluded the shares at Bloomsbury is a recovery stock. The cash balance is recovering steadily and profits are likely to be higher than expected.
At this level, investors should grab a few shares for a recovery play. It wouldn’t surprise me if the shares go to £2.50 given their momentum and the future release of a new Harry Potter novel.
This is one for you to DYOR!
Share price: £8.15 (up 3%)
I didn’t know they released their results early due to a leak. But, anyway, what has Gear4music achieved in the last six months?
Sales grew by 44% to £31.2m, due to a similar increase in active customers. But gross profit margin fell to 25% from 26.6%. And that practically wiped out their interim net profit and half EBITDA.
Last year, they reported EBITDA and net profit of £1.3m and £750k.
Diving down to the numbers:
International sales grew by 70%, compared to 30% growth from the UK. The customer’s average order value grew by 4.8% to £131.66.
When it came to products, their own brand saw the biggest growth, but they are still very much reliance from other brands because it makes up 70% of their sales. The number of products grew to 40k from 34k, an impressive catalogue.
On their financial review, the stand out item is total labour cost rising from £1.73m to £2.86m, a 65% increase. It is responsible for the down in net profit.
The company is expanding their distribution centres by purchasing freehold property worth over £5m for the next phase of their expansion. Given that sales have increased so fast, along with their proven business model it is wise not to cause supply-chain disruptions.
Their non-Current assets rose to £13.5m from £7m.
Net borrowing increased to £8m from less than £1m the previous year. It caused net borrowing to rise from £1m in net funds to £4m in net borrowings.
Onto their cash flow:
Cash flow has deteriorated. If we use cash flow before changes in working capital, then it fell from £1.4m to £700k, although overall cash flow saw no change.
The issue of debt and equity (£10m) helped boost cash balance and fund investing activities.
The company found a niche in selling electrical musical equipment online and is making a killing with sales rising from £12.3m to £56.1m in five years.
Meanwhile, profits are struggling to see major progress and it looks like they will struggle to make a profit this year.
I know people will say Gear4music is reinvesting for growth and this is true.
However, if we break down the numbers, something is missing.
If you look at incremental sales it increased by £44m, with next year forecast sales of £80, then it increases to £67.7m.
But the change in intangibles and tangibles assets saw this increase from £2.5m to £7.1m, an increase of £4.6m, but a property purchase has taken assets to £13.46m bringing the increase to £11m.
(Period between 2013 and 2017.)
So, for every £1 spent in capital it produces £6 of new revenue.
Meanwhile, their operating expenses have been increasing at the same pace as sales.
If you look at their inventory level, it grew from £3.6m to £11.7m. But in proportion to turnover, it declined from 29% of turnover in 2013 to 20.8% of turnover in 2017. This inventory efficiency should have led to improvement in profitability.
Unless, someone can explain to me why profits are low given the improvement in inventory management and low capex spending, am all ears!
But it did raise £10m in equity issue and they raised £4.2m from sales of 610,000 shares at £6.90 each.
Brokers are forecasting £100m in sales by 2020. Meanwhile, Gear4music EPS is to grow from 12 pence to 18 pence.
With the current share price at £8.11, this means forward-PER is 45 times at 2020.
Shareholders have done well with Gear4music. The shares perform a seven-bagger in the space of 15 months!
Current PER has reached 70 times and EV/EBIT is on 62.5 multiple. Even when measured against revenue it’s at 3 times.
Gear4music has seen tremendous revenue growth. For now, the market is ahead of expectation, given that at current market capitalisation, the forecast PER by 2020 is 45 times!
Unless Gear4music shows significant improvement in net cash flow and operating profit, I fear the shares will enter a reasonable price correction as much as 30%, which takes the share price around £5.80-£6.20 or 49 times PER.
A correction looks like a real probability in the short-term.
Thanks for reading and make sure to subscribe to my blog.
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.