I’ve been asked the following about Connect (LSE:CNCT):
“Are you overlooking the debt? The debt of 256 million means the NTAV is minus 94 million.
Be good to get your thoughts here…Surely the argument to pay down debt is better than paying such a high dividend. Imagine if the business was transformed into a low debt business and refocused onto growth areas?
Are the directors mismamaging here, as Glen, you and I would be paying off or negative equity debts and not lining the dividend seekers as that’s dead money. Case of mismanagement?”
These are certainly issues that need addressing. I’ll set out some quick thoughts on this Saturday morning (got to take down scaffolding in a few minutes). These are rough ideas so I would welcome other views.
Let’s start with some balance sheet data.
£m | February 2018 | August 2017 | February 2017 | August 2016 | |||
Non-current intangible assets | 101 | 107 | 133 | 165 | |||
Other non-current assets | 49 | 51 | 55 | 62 | |||
Trade and other receivables | 92 | 98 | 154 | 139 | |||
Other current assets | 21 | 84 | 108 | 52 | |||
TOTAL ASSETS | 263 | 340 | 450 | 418 | |||
Trade and other payables | -136 | -136 | -213 | -199 | |||
Other current liabilities | -48 | -91 | -122 | -83 | |||
Non-current liabilities | -72 | -88 | -104 | -123 | |||
NET ASSETS | 7 | 25 | 12 | 13 |
The balance sheet is definitely one of the most unusual I have seen. Due to all it acquisitions it has lots of intangible assets, goodwill. Tuffnells goodwill accounts for £89m of that. In reality, Tuffnells goodwill is probably zero.
Also the BS is heavily dependent on very large amounts of credit granted by its suppliers – mostly publishers. Connect does not pay for newspapers and magazines until sometime after its customers have paid them. Newsagents pay via weekly regular direct debits but across the Group the average credit period taken by customers is 24 days. However, the average credit period taken by Connect from its suppliers is 32 days. When turnover averages £4.4m per day the excellent cash-conversion cycle produces about £35m of useful cash.
So a concern would be that this positive cash cycle is interrupted, meaning that Connect would need to borrow more from banks.
There is reassurance in the contract terms with publishers – they contain clauses granting long credit periods, and the contracts last for five years.
Bank finance is over £80m. This is not supported by collateral, but merely by cash flow stability. Historically, this has been extraordinarily good. There is a danger that it sto…………
………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1