Author Topic: SCS - SCS Plc  (Read 591 times)

samwise

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SCS - SCS Plc
« on: January 14, 2020, 10:20:21 AM »
Second largest sofa retailer in UK.

If I count all cash as excess I get EV/ FCF = 2

If none of the cash is excess, I get p/FCF = 5 (no debt)

FCF has been higher than income for a while.
P/E is 8.5.

No debt, lots of excess cash. Which is weird for a business 25% owned by private equity. Their biggest competitor carries some debt. I havenít seen this amount of cash sitting around except in family companies or in Japan.

ROE is 28% (with cash), which is because of a negative working capital model: customers pay a 50% deposit, get the sofa in 8 weeks, pay the rest before delivery, and the supplier gets paid a month later.

This model produces good ROE, but caused a liquidity squeeze in 2008, and SCS went bankrupt, rescued by private equity. The same management is in place now and they keep talking about the resilience of the business, which they seem to measure by the cash on the balance sheet. While I can see the comfort it provides them, I doubt this is sustainable in a public UK company.

There is a VIC writeup from a couple of years ago, but the author seems to have sold his holdings.

I donít expect anything quick. There will no only slight growth with UK gdp and inflation, although management has been talking of a few more stores forever. Until  then you have the 7% dividend yield.

Has anyone else looked at this name, or shopped there?
« Last Edit: January 14, 2020, 10:53:35 PM by Parsad »


WneverLOSE

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Re: Scs - scs plc
« Reply #1 on: January 14, 2020, 10:54:45 AM »
I took a 15 min look at their annual report so I might got it wrong but it seems that they are really the subprime retailer of sofas.
50% of their customers buy using financing they offer with a 1 year no payment and a zero percent interest after (and they really push it hard, you can see in the store pictures in the annual report the posters in the store).

ROE is too high in my opinion, if it could be sustained I would take a plane to the UK and start my own competing sofa store, I suspect that if you take away the credit they offer (and get payment immediately since they use 3rd party lenders) ROE would be much lower.

so basically you have a company that is not growing much in a not growing sector, selling for 9 times earnings that I suspect will be hit hard in the next recession / credit crunch, seems fairly valued to me (but again, what do I know about the UK and investing (I am down 10% YTD  :P))


samwise

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Re: Scs - scs plc
« Reply #2 on: January 14, 2020, 07:06:32 PM »
8.5 P/E is with cash included in market cap. If itís all excess cash then the P/E is 3.

Itís useful to spend 15 minutes on the competition too: DFS. Whose sales are 3 times bigger. DFS is at 15 P/E. with debt.

They have the same negative working capital model, but keep no excess cash. ROE would be amazing (except that they also have a lot of goodwill). But it serves to demonstrate that the sofa retailers in UK all have this business model. It also shows that you can run this model without the excess cash.

The ROE has lasted a long time. My best guess is itís because suppliers of furniture and credit are too fragmented and commodified. There are also advertising advantages of scale ( as I recall, scs spends 7% of revenues on advertising). These guys also seem to be tremendous operators with non-stop focus on costs. They are able to make it work in their current format, but it doesnít travel well to a different demographic. Some sofa stores within House of Fraser (which looks like a department store) were not successful. So donít catch that plane to the UK just yet :)

Agreed that they are the dollar store of sofas. Sofas are big ticket discretionary purchases, so sales would fall in a recession. I donít have any evidence that we are at peak earnings either.

ROE on the financing might be lower, as I am sure is the ROE for suppliers. But unless their bargaining power is changing it will remain that way.