SCS (and me) crunched
Posted on June 12, 2008 by Richard Beddard
Filed Under Companies |
However, the cosy scenario I presented, that SCS might comfortably survive a period of low sales and margins due to its cash cushion, is no longer credible. It might survive, but it doesn’t look comfortable to me. I didn’t plan on the stock falling another 75% (or more) before it started to recover, and that recovery is less likely as the cash burns away.
Here’s the news-flow since March:
- 26 March: SCS reported an £8.8m trading loss in the first half of its financial year, net cash was £15m
- 14 May: It warned of lower sales, and lower expectations for profit in the second half. Net cash was £4.8m
- 11 June (yesterday): It announced a credit insurance company has refused insurance for SCS.
The FT explains how some of SCS’ suppliers rely on bank loans raised on invoices from SCS for funding. It’s not terminal. Not all SCS suppliers use credit insurance to borrow money, and there is more than one insurer. But the withdrawal of the insurer is surely a serious vote of no confidence in SCS, heaps more doubt on the beleaguered furniture supply industry, and SCS and the suppliers who use insurance must sort out how they trade.
In the FT, David Knight, the chief executive says, “The indications are that we will have net cash at the year end in July” and the fall in SCS’ cash balance isn’t as precipitous as it looks in my mini chronology because in May, when it only had £4.8m, it had just paid its suppliers. In March, when it had £15m, it was just about to pay them.
Essentially the story is the same as it was in March. People are spending less and sofas are one of the easiest purchases to put off. SCS has to conserve cash until it can sell sofas at a profit again. But it’s more extreme: I didn’t anticipate full year losses, which now seem almost certain, or that the levels of cash the company reports in its year-end and half-year statements would be so far above levels at other times of the year.
It’s uncomfortable being wrong when you champion an out-of-favour stock, especially if you subsequently buy them, as I did (I’m still a shareholder). As Peter Lynch, the fund manager famous for being right more often than he was wrong, wrote in One up on Wall Street:
If IBM goes bad and you bought it, the clients and bosses will ask: “What’s wrong with that damn IBM lately?” But if La Quinta Motor Inns goes bad, they’ll ask: “What’s wrong with you?”
When he wrote the book in late 80’s IBM was in every fund manager’s portfolio. Replace La Quinta Motor Inns with SCS Upholstery and you’ll know why I’m beating myself up now. As a private investor, I’m the client, the boss, and the fund manager, but that just makes it worse - I can’t get away from myself 
Anyway, here’s another recovery play, Johnson Service (JSG), and this time it’s not me that bought the shares, but interim chief executive and restructuring expert John Talbot, who bought £135,000 worth in April. We’ve given it the iBall treatment.
And here’s a picture of me in SCS, in happier days:
I didn’t buy the sofa, but I was tempted by the offer (four years, interest free…)
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10 Responses to “SCS (and me) crunched”
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Hi Richard,
Bad luck on SCS. I was wondering if you had worked out how much compensation you would receive as a victim of the credit crunch. I think the formula is something like
$Compensation = k * $LOSS * NUM_HAPPY / NUM_SAD
Where
k is some unknown constant still to be worked out
$LOSS is the amount of money you managed to lose
NUM_HAPPY is the number of people who benefited from the upside risk (usually a small number close to 1)
NUM_SAD is the number of people who lost out from the downside risk (usually a very large number, such as 100 million)
Funny you should mention compensation Robin. I keep waiting for the Bank of England to step in and offer support to SCS. It’s not insolvent, after all!
Well if SCS goes down then it will be a house of cards. DFS, House of Leather…
We will have nothing left to sit on. That seems pretty much like ‘too large to fail’ me.
I bought a board game at my son’s school fair on Saturday for £1. It was called ‘Go For Broke’ and the idea is to lose all your money before anyone else.
I wanted my son to learn some skills that will help him become the CEO of a large financial organisation when he grows up.
Hi Richard,
Sorry to hear about ScS, also looks like they will struggle to raise finance too, will you hold on and take up any rights issue or will you sell what is left?
I still can’t believe how swift the demise of ScS and LoL has been… I don’t think anyone could have predicted that
I also notice that you are now looking at JSG… Now you probably don’t want to hear this, but I think that we are looking at another risky proposition.
I may be wrong but (to me) they are a very risky turnaround proposition. They have an awful lot of problems, a large amount of debt, a hotchpotch of business that don’t really compliment, lack of direction, poor track record & to top it off they have sold off their most profitable business… And the only thing that stands out on John Talbot’s CV to me is his association with Marconi’s restructuring.
This is not to say that they they will not become a successful turnaround, but when I look at businesses like this I always think of two famous Buffett quotes:
” When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
and,
“Turn-arounds” seldom turn.”
May I also take the opportunity to recommend two great businesses that would be more than worthy of an iBall?
Homeserve
Mouchel
Kind Regards
Wrex
Hi Wrexhamite.
Nice of you not to rub it in, given that you were right. Of course, I’m in two minds about what to do, which is not a good place to be! One thing’s clear though - I don’t understand as much as I thought I did about the sofa business so I’ll be focusing on rectifying that before I make a decision.
About JSG - I agree. I’m very interested in what happens next though. We haven’t heard much. I made a list of ten turnaround situations and I’m watching them all - as I don’t own the other nine it’s an educational exercise at this stage. No doubt Buffett would be cringing.
Thanks for the suggestions - I shall definitely look at them - and they weren’t on my radar. Perhaps you could tell me a bit about them?
Wrexhamite - I’ve seen the PE ratios for Mouchel and Homeserve and I now know why they’re not on my radar! Still that doesn’t disqualify them from iBall - where we seek to serve all kinds of investor. I can see that these are growth shares. Tell me why the businesses are going to keep growing!
Hi Richard,
I’m not one to rub people’s noses in it, it’s not my game… Especially when it comes money. It’s a tough call for you with ScS, personally I think i’d cut my losses,and learn from it. That’s what I did with Marconi, Coolabi, Cyan & woolworths!
These days are long gone though, along with the poor returns.
Turnarounds can be pretty lucrative but in my experience you need to have an “edge” to win in turnarounds.
One of my best turnarounds was Game Group. I picked them up for around 70p in 2006, massively undervalued at the time on the back of a flat console market & genral high street gloom.
My “edge” was twofold, I knew somebody who worked on the shop floor who was saying good things & I also knew that Nintendo had this great new console in the pipeline that would give the PS3 a good run for its money.
When looking back my investment did far better than I ever expected, having not factored in what a big a hit the Wii would be. But I’ve subsequently sold out because I believe that they are massively overvalued at anything over 200p. Crazy markets.
What other turnarounds are you looking at? I promise I won’t pick them all apart…
Anyway, I digress… On to Mouchel & Homeserve.
You are right about the growth element but we are not talking about “hot stocks” as such. They are both market leaders in their respecive industries and have very strong franchise qualities.
The result is that they have a scalable, proven business model that will throw off lots of excess cash in order to fund future growth… That’s the key to finding businesses that make good investments.
Both companies are expanding overseas on top of continued UK success and I can see no reason why their scalable business model will not work in other countries… Although Homeserves p/e does give me vertigo from time to time!
I’d recommend you read both businesses annual reports, you will then see why I’m a big fan.
Out of the two Homeserve has the best year-on-year growth prospects but that is also reflected in the p/e ratio so both are on a par overall.
If you are looking for a good quality “growth” stock without the hefty p/e then I’d also consider the Restaurant Group.. They have some exeptional franshises in their portfolio & a management team that know what their doing.
They are on a p/e of 9 at the moment and for no good reason in my humble opinion! I’m not a shareholder yet but I read their annual report today and I am seriously considering it
Kind Regards
Wrex
Hi Wrexhamite,
Learn from it, I certainly will, though as far as my own trading goes I doubt I’ll abandon my general philosphy, which is to look for deep value and accept that sometimes I’ll be wrong - publicly it seems if I choose to write about those stocks!
Turnarounds: http://blog.iii.co.uk/ten-boring-companies-in-deep-trouble/
Your Game experience is interesting. I sniffed at them but never bit.
Restaurant Group - I really appreciate the stock idea and I’ll look at all three with a view to cooking up something iBallish or for one of our sister Mags.
Right now I’m looking at two potential growth engines: Darwen: http://blog.iii.co.uk/dhp/
And Education Development International: http://blog.iii.co.uk/a-company-and-a-book-to-cheer-you-up/
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