United Carpets Group – LON:UCG
Share Price – £0.0945
Market cap – £7.7m
This franchiser of carpet and bed retailing outlets first came into existence back in 1997 when founded by husband and wife team, Paul Eyre and Deborah Grayson. However it wasn’t until 2005 that the company sought a listing on AIM, which according to the IPO document, suggested that the funds raised were to be used in an ambitious expansion campaign. The company then embarked on that growth plan at just about the worst possible moment, going from operating 51 stores in 2005 to a peak of 85 stores in March 2011. Unsurprisingly and in the grip of the 2007 financial crash, the company fell into difficulty. Presumably having lots of new and unproven stores where trading collapsed, combined with leasing arrangements that were signed into during boom times would put the company on a very precarious footing. Indeed trading was so difficult, the company was actually forced into pre-packaged administration for awhile, even being de-listed from AIM for a period of time. Quite remarkably though the company emerged a smaller, more leaner operation, with a lot of the onerous leases and commitments discarded. Since the pre-pack, the company has cut the number of stores further, going from 67 to 57 as of the most recent annual report. Usually a shrinking retail footprint would be of concern to me, but in this case, increased profits and LFL sales suggest management have been quite astute in closing non-performing stores.
With all that said, it’s very hard to get away from the fact that this company only recently well into administration. Usually, this is the sort of thing to pass on a company. In most cases, companies that are forced into administration, do so because they are inherently poor businesses. In this situation, I think there are extenuating circumstances.
- Both founders remain at the company from 2005 to this day, with Paul Eyre having never sold a single share, and partner Deborah Grayson’s actually increasing her stake slightly through the years. Indeed, the actions of this management team during the 2011 crisis, where their super-human efforts kept the company in public ownership certainly suggests to me proper alignment of their interests with minority shareholders (who could easily have been shafted).
- The fully diluted share count has remained almost entirely static over the entire period the company has traded on the public market. What’s key for me is that no new share capital needed to be issued during the 2011 crisis. Owner operators who believe in the businesses they run are usually loathe to issue shares, and this appears to be the case with United Carpets.
- The aftermath of the 2007 financial crash appears to have put paid to the expansion plans. Certainly, the market appears to have taken a dim view of this, but is the lack of growth really such an awful thing? In a difficult retail environment, an owner operator might be content with retrenching and running a smaller, but more profitable operation. It appears to me that management have learned the lesson of their brush with near-death in 2011 and are not eager to repeat the mistake.
Now that I am reasonably comfortable with the business, what do I value it at?
United Carpets Group historical income statement
United Carpets Group historical balance sheet
In terms of a tradition EV/EBITDA ratio, we have the following.
- Enterprise value: £5.9m (after deducting £820k from the current cash total of £2.6m for the special 1p dividend)
- EBITDA: £1.75m
- EV/EBITDA: 3.4x
On a traditional P/E ratio, we have the following
- Price: 9.45p
- Earnings: 1.57p
- P/E: 6x
Looking at the share price, the market perception is that this is a company going nowhere. While income is only up slightly over the past four years (13% cumulative), shareholders equity has gone up 300% in the last six years. It gets better than that. In the last three years, over £2.4m of dividends have been paid out as well (I am including the recently announced, but as of yet unpaid 0.28p final dividend). If future dividend payouts are anything like we’ve seen in the past, then based on the current market cap I have bought at, I should see 1/3rd of my investment returned in dividends alone in three years. While that remains to be seen, it’s clear this company is a huge cash generator and has been unfairly ignored by the market.
This is a tiny company where most of the shares are tightly held by the majority holders. Worse yet, on paper it looks like it’s going nowhere and operates in a sector that’s universally hated in the market. When you scratch beneath the surface on this one, you can’t help but be impressed. Firstly, you need to consider that the company operates in a depressed retail sector, where competition is brutal. If it can generate the returns it does in such a hellish environment, then there is potential for a substantial re-rating of this share in a more favourable consumer environment. I have no idea when that day will come, but until them, I am happy to enjoy my dividend and hefty 17% earnings yield.
I hold shares in the aforementioned share.