UPDATE RE BID APPROACH – 9 JUN 17 – Our  Spec Buy call on SGI earlier this week appears particularly prescient as the company has this morning announced an approach from Disruptive Capital per HERE. Bearing in mind management’s recent comments re turning the business around only weeks ago per here – “There will undoubtedly be further challenges ahead but following the Sale and taking into account the cost reduction measures that we have already taken the Group can finally start to look to the future and focus on its core businesses.  Despite the upheaval of the last 15 months, the resilient and inherent value of our brands has continued to be recognised across the industry and we look forward to ensuring that this is reflected in shareholder value” and the debt profile moving the right way we would expect the Board to hold out for a price towards the 20p level – around the company’s book value as we detail below. Accordingly at a current price of 13p we remain buyers.

There are not many companies that have had more troubles over the past few years than the stamp and collectables business that is Stanley Gibbons. Previously a private investor favourite, due to the shares having risen from a low of 12.25p in 2002 to a high of 383.5p in 2014, a series of issues have since seen the shares come back down to the current 12p. Now capitalised at just £21.47 million we see recovery potential in the shares due to a recent management turnaround plan and the fact that the stock is now trading at a discount to the value of net tangible assets.

The business

With a history going back to 1856 Stanley Gibbons is a merchant of rare stamps and other collectable items including, amongst other things, coins, medals, books and film merchandise. The company listed on AIM in September 2000 after being demerged from Flying Brands and further expanded the business over the years by making a number of acquisitions. These included coin dealer Noble Investments in 2013 and antiques dealer Mallett in 2014.

Management had built up a business making over £60 million of revenues by the 2015 financial year (to March) but troubles started to surface in April of that year when the company hit the markets with a profits warning, blamed on a number of high value sales not being completed by the year end. Another warning came in October, this time a fall in trading in Asia being the primary cause. Alongside this, an increase in debt taken on to finance acquisitions caused funding problems, with net borrowings peaking at £24 million in March 2016.

To deal with matters a rescue equity financing of £13 million was completed in March 2016 but given investor’s loss of confidence in the company the issue was priced at just 10p per share, a value of just 2.6% of the peak share price seen only two years earlier.

Restructuring brings turning point

In reaction to events a new senior management team has been appointed by the company and whom have put in place a restructuring plan focused on cost reductions and realising value in the core brands during the last 12 months. To date over £10 million of annual cost reductions have been found under the plan, with the net debt position being further reduced – as at 30^th September 2016 it was down to £16.5 million. A turning point has now been reached according to the new management team, with operating cost savings now visibly feeding through to day-to-day trading.

Providing further evidence of a recovery, a few nuggets of positive news have been announced to the market recently. Showing that there is still demand for the company’s high value stock, a strip of four Indian 10 rupee stamps, featuring Ghandi, were recently sold for a record £500,000. Further, in early May, a trading update revealed that original cost savings targets had “far exceeded” original targets. In addition, the sale of certain assets and liabilities of the company’s Interiors division has been announced for £2.4 million, with a 25% stake in art and antiques fair business Masterpiece London sold for £1.4 million. The proceeds will mainly be used to reduce debt, support the turnaround programme and for working capital.

On the downside, overall group trading is said to remain subdued, with sales of rare philatelic collectibles to high net worth clients slower than expected. In addition, a significant debtor has indicated it may wish to pursue a counterclaim against a group subsidiary company. The firm intends to contest this but as yet cannot quantify the final outcome. Finally, current banking facilities of £18.3 million (£17.2 million of which were being used as at 31^st March 2017) are due for renewal in May 2018.

Discount to net tangible assets offers attractions

While Stanley Gibbons has had its troubles it now looks to be turning a corner. But with several issues remaining investors are still putting a low value on the shares. Where we see value at Align is in Stanley Gibbons’ balance sheet.

Despite the net debt position, the balance sheet showed net assets of £44.99 million as at 30^th September 2016, with the major asset being £59.38 million of stock and inventories – of this £40.1 million is stamp stock. However, the recent May trading statement suggested that the net asset position as at that date could be reduced by around £2.5 million due to the incorrect recording and reporting of sales and profits in relation to some of the firm’s investment plans. So we prudently adjust the net asset position for this factor, giving a figure of £42.49 million.

With a current market cap of £21.47 million this represents a price to adjusted book value ratio of just 0.51 times, or a discount to book of 49%. Even if we strip out the intangible assets of £19.46 million (giving adjusted net tangible assets of £23.03 million) the price to net book value ratio is 0.93 times, or a discount of 7%. To be clear, we do not believe the intangibles warrant a zero value hence the margin of safety we see at current levels.

We thus see both value in the asset backing and recovery potential in Stanley Gibbons shares given recent management commentary and continued debt reduction. Accordingly we apply a Speculative Buy stance to the shares.

CLEAR DISCLOSURE – Both Align Research Ltd & a Director of Align Research hold interests in Stanley Gibbons and are bound to Align Research’s company dealing policy ensuring open and adequate disclosure. Full details can be found on our website here (“Legals”).

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Nothing in this report should be construed as advice, an offer, or the solicitation of an offer to buy or sell securities by us. As we have no knowledge of your individual situation and circumstances the investment(s) covered may not be suitable for you. You should not make any investment decision without consulting a fully qualified financial advisor. 

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• Stanley Gibbons