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Victoria AGM, Dunelm Results and Brexit Impacts

I attended the Annual General Meeting of Victoria (VCP) in central London yesterday. I have held a few shares in this producer of carpets and tiles since the revolution that installed Geoff Wilding as Executive Chairman a few years ago. He did a great job of turning the business around but the share price fell back sharply last October over concerns about the level of debt and a failed bond issue to replace bank debt which cost £7.3 million. As Mr Wilding says in the Annual Report: “There is no way to view the majority of these costs other than, with the benefit of hindsight, a waste of money”. The Annual Report is certainly worth reading as it is a good example of the Chairman and CEO revealing their thoughts on many issues rather than the polished and anodyne statements you see in most such reports.

The company has subsequently issued some loan notes with a five-year term and fixed rate of interest to replace some of the bank debt. These were described as “covenant light” in the meeting. The company has adopted the use of high debt levels (net debt/EBITDA ratio of 3.2) to finance acquisitions and to finance substantial restructuring of its operations. There is extensive justification of this policy in the Annual Report but there are clearly still concerns among investors.

Last year the company reported a loss of £7.9 million despite reporting an operating profit of £24 million because of the exceptional finance costs, restructuring costs and amortisation of acquired intangibles. This is one of those companies where it is best to look at the cash flow statement to see what is going on as the accounts are otherwise quite confusing. The company did generate £52 million in cash from operations last year.

An announcement from the company on the morning of the AGM contained positive comments and they expect to meet market expectations for the full year. They are also continuing to look at further acquisitions although it states “mindful of financial leverage levels, the Board is proceeding cautiously”. I would certainly like to see some reduction in debt levels with fewer exceptional costs for a period of time.

There were less than a dozen shareholders at the AGM. There were only a few questions. One was on the attributes of new non-executive director Zachary Sternberg, and what he will be contributing. Apparently he is the investment manager of a US fund who have a 15% stake in Victoria. It was said he is very good at financial analysis but is not a flooring expert.

I asked about the breakdown of sales. Turf (i.e. artificial grass) is now 4% and growing. Otherwise it’s about two thirds tiles to one third carpet. In Europe hard flooring (not just tiles but wood/laminates) is growing but the demand varies between countries. That surely is has been a long-term but slow trend in recent years in the UK for example. Even my wife wants to replace our hall carpet with something else because she is tired of cleaning it but other areas are likely to remain carpet.

I also asked about the impact of Brexit, hard or otherwise. Earlier in the year they built up stock in case of disruption and are now doing this again. But the CEO said they might be able to take advantage by increasing prices. He did not appear too concerned about the prospects.

In summary a useful meeting, but investing in this company is very much dependent on one’s trust in Geoff Wilding to manage the debt levels and its business operations wisely. Mr Wilding has a beneficial interest in 18% of the shares although he did dispose of some shares last year.

Another company I hold is Dunelm (DNLM). The company issued preliminary results this morning and at the time of writing the share price is down about 8%. That may be surprising because the earnings were slightly better than forecast and a special dividend was also declared. Like-for-like revenue was up 10.7% and market share is increasing in the homewares sector. The company appears to have been successful in moving into “multi-channel” operations with internet sales rapidly increasing. So why would shareholders be concerned about the announcement?

One comment in the announcement was “Whilst trading performance has continued to be strong, we remain cautious about the full year outlook due to ongoing Brexit uncertainty and specifically the impact it may have on consumer spending as we enter out peak period”. They go into more detail on the impact of Brexit, especially a “no-deal” version which might disrupt imports after the possible Oct 31st date. But if Boris Johnson loses his fight against the “remainers” this evening then it could be put off yet again, even into “never-never” land. Comment: What a shambles and the House of Commons is descending into anarchy. I hope Mr Johnson manages to call a General Election to get this matter settled finally. But at least a Scottish Court has rejected the challenge to the Government’s ability to prorogue Parliament which was surely misconceived. Legal cases driven by emotion are never a good idea.

As regards Dunelm, perhaps another issue that rattled investors was the adoption of IFRS16 which will apparently reduce group pre-tax profit by approximately £3 million (i.e. by about 2.3%) but with no impact on cash flows. However EBITDA will increase. IFRS16 concerns accounting for leases and has surely been well known about for some time so it is odd if this was the cause of the share price fall.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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