7:59 cut – G4M, BME

Gear4music – H1 Results

I took a starter position in this company (too early) after their last profits warning, and today might just be the day when I decide to either make it a serious position or to sell it entirely.

The company previously decided to go for top-line growth resulting at the expense of lower margins and also resulting in hitting capacity constraints over an important Christmas period. Have they managed to return to profitability this time, and has it adversely affected revenue?

Gross margin is marginally up from 22.7% to 25.2% on revenues up 16%. This has resulted in a 29% increase in gross profit and 206% in EBITDA, but not quite break-even at the operational profit level.

Looking at the figures more closely, ignoring the £0.7m of amortisation on their e-commerce platform development would be highly inappropriate given that they capitalised £1.45m this year alone and that this spend needs to continue (at some level) indefinitely in order to stay competitive. Similarly, it is likely that the business would rapidly decline if they ceased their £3.9m of marketing costs.

Overall I do think that “breakeven” is the correct interpretation of their H1 results.

So, with H2 including the Christmas period, what are the prospects for the full year?

Last year the revenue split was 40-60, but administrative expenses (which include marketing) are also much higher in H2, leading to breakeven in H2 last year.

With revenue growth slowing to 16% and a recent history of poor execution, it is difficult to see how this company can grow into its cost base and a return to significant profitability. They carry significant debt, trade at 2.7x book value and there is every indication that if they cut back investment and marketing for short-term profitability then the resulting cashflow would not cover their market capitalisation.

It is for these reasons, along with a continued push to focus my portfolio on my best investments, I have decided to sell this morning.

[Edit: Despite getting quotes elsewhere for 250p at the open, I only managed to get 221.25p because I held in AJ Bell who could not give me a quote for for 5 minutes and will not execute limit orders in the first 15 minutes]

B&M Bargains – H1 Results

My interest in this company is limited to the fact they sell a lot of UPGS products in the UK, although UPGS has been diversifying into supermarkets of late.

Pre-exceptional impairment charges, the company seems to be continuing to perform well, with 25 net store openings and at least further 21 expected in H2 – a growth rate of about 8%pa. Replacement of stock with their own sourced product in France (where UPGS don’t currently have a strong presence) is also positive. Jawoll in Germany is a concern however and something I need to look into further.

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