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Asset values
Inventories in Scholium’s (LSE:SCHO) accounts are valued at the lower of cost or net realisable value. So at least we do not have the problem of managers estimating “fair value” at each balance sheet date.
However we do have the problem of managers being over-optimistic in failing to mark-down the value of a book that has been hanging around for say three years.
Thus, I suspect that the vast majority, if not all, of the stock items are valued at cost, even if in the managers, in their heart-of-hearts, would acknowledge that a more objective analysis suggests a lower value.
Even if we go along with the idea that the company will not be liquidated (which perhaps it should be) then the “going concern” values for inventories are suspect, as the directors point out in the 2016 Report: “The Group will trade in rare and collectible items, which may be highly illiquid. The value of goods acquired is difficult to assess and it may not be possible for management to sell the assets at or above the price for which they were acquired. The value of assets in the balance sheet may not represent the actual resale value achievable.”
A bulletin board writer wrote: “Another worry could be that the directors are doing a “Mallett” and being over-confident with their stock valuation”.
I was a shareholder in Mallett in its last days before being acquired, and witnessed first-hand the incompetence and lack of interest in shareholder wealth by the directors.
It was quite a relief when the company was bought by Stanley Gibbons (who have regretted that action ever since).
The point is that the antique values shown in the balance sheet of this Mayfair-based dealer were much higher (£11.46m) than what Stanley Gibbons would pay for the entire company (£8.6m). NCAV was, under a superficial calculation using BS entries, £10m.
If we take an alternative scenario for Scholium, that of liquidation over a short period, then the inventories may be worth even less than on a going concern basis.
As a deep value investor I’m reluctant to put the inventories value at more than 50% of that provided by directors in the BS because they bought a lot of this stuff in their post-IPO exuberance, and probably bid up market prices in doing so.
That would put the inventories at £7.88m x 0.5 = £3.94m.
This will reduce adjusted NCAV to £5.36m, compared with the current MCap of £4.9m.
Even though the greatly adjusted NCAV is higher than MCap it is not a buy because I have a number of qualitative concerns.
Managerial competence in day-to-day business
The profit record is appalling. That alone makes me wonder about the level of interest and dedication to profits for shareholders within the culture of the featherbedded senior managers of this firm.
Are they really interested in the nitty-gritty of business, or merely interested in doing posh things in posh surroundings?
Corporate strategic analysis is poor.
Margins are low because as the 2016 Report states: “The market in the books and other items in which the Group trades is competitive.…the Group faces various competitive pressures including from the major auctioneers, Sotheby’s, Christie’s and Bonhams, as well as smaller auctioneers and a large number of dealers and smaller operators. The Group is likely to face continued and/or increased competition in the future both from established competitors and/or from new entrants to the market. The Group’s competitors include businesses with greater financial and other resources than the Group. Such competitors may be in a better position than the Group to compete for future business opportunities. If the Group is unable to compete effectively in any of the markets in which it operates, it could lead to material adverse effect on the Group’s business, financial condition, and operations.” (2016 Report)
How can a board of directors write such a paragraph and then have no plan of action for gaining some degree of pricing power (or liquidation)?
Instead they do more of the same:
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