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Today I’ll examine if Spaceandpeople (LSE:SAL) achieves high returns on tangible assets on a consistent basis. This will be followed by rough estimates of value informed by the return on net tangible assets data. Two complications arise immediately in the analysis:
- Prettifying of the reported profits
The directors have got used to not writing off the costs of new ventures as they happen. Instead they store up these costs. When the venture fails much of the cost is written off as an exceptional item. This happened in 2014 and 2016:
2014: “reduce costs and streamline overheads: £391,000” (consisting of redundancy £230,000, other £11,000, retrospective costs in relation to UK centres £150,000)
2016: “£289,000 restructuring costs and MPK France pilot costs, closing of S&P+ business £543,000
In the following, I regard these cost as deductions from profit related to ordinary business because I’m trying to gauge the capacity of the firm to produce cash for shareholders over a span of years.
Average of exceptional items over the last five and a half years: £222,000 pa.
- The asset total in the balance sheet is distorted – depending on how you look at it
In 2010 the company bought Retail Profile Holdings putting £7.98m of goodwill in the balance sheet. In 2012 it bought a 62% holding in an Indian subsidiary which added another £0.24m of goodwill. None of this goodwill has been written off. Thus, the BS holds “assets” of goodwill to the tune of over £8.2m.
If I undertook my normal Return on Net Tangible Assets (RONTA) calculation which includes the use of shareholders money to buy these companies I would have a much larger denominator of around £9m, pushed up by the £8.2m, which means I get a low RONTA.
That analysis is valid for one purpose: it tells us the rate of return on shareholders’ money invested in the past. To use it for thinking about what might happen in the future we would be assuming that the company truly is using assets of around £9m in its business, that is £8.2m of goodwill and about £0.8m in day-to-day net tangible assets in the business.
A thought experiment: If through great managerial endeavour the company attracts double the number of clients it currently has, and in future gains double the annual profit after tax it has produced in the past five and half years, by how much would net tangible assets need to rise?
Would they have to rise from £9m to £18m to support the extra business, or from £0.8m to £1.6m? Assuming away the possibility they do not buy another company to grow (they don’t have the cash anyway) I think it more likely they need invest only another £0.8m in kiosks, larger promotional units and retail stands.
This means that the outcomes of the RONTA calculations can be used in two ways:
(a) an examination of historical use of shareholders money – the rate of returned earned there.
(b) how much they have made and are likely to make (assuming a continuation of the same profit rather than a doubling) as a percentage of the shareholders’ money actually put to use in today’s business in capital items and working capital (rather than that devoted to a merger in 2010).
The different perspectives produce remarkably different estimates of value.
Selected data from the income statements and balance sheets
| £’000s | 2018: H1 x 2 | 2017 | 2016 | |||
| INCOME STATEMENT | ||||||
| Profit after tax | -154 | 919 | -660 | |||
| Amortisation charge this year for accounting goodwill following acquisitions | 12 | 18 | 16 | |||
| Exceptional items distorting profits (positive or negative) | 0 | 0 | 0 | |||
| Profit for shareholders | -142 | 937 | -644 | |||
| CURRENT ASSETS AND LIABILITIES | ||||||
| Inventories | 0 | 0 | 0 | |||
| Receivables | 3,180 | 3,367 | 3,350 | |||
| Cash needed for operations (assumed) | 500 | 500 | 500 | |||
| Other current assets | 0 | 0 | 0 | |||
| Payables | -3,095 | -5,120 | -4,266 | |||
| Short-term debt | 0 | 0 | -1,000 | |||
| Other current liabilities | +111 | +46 | +146 | |||
| Working capital for operations | 696 | -1,207 | -1,270 | |||
| Surplus cash (assumed) | 12 | 2,161 | 1,058 | |||
| NON-CURRENT ASSETS AND LIABILITIES | ||||||
| Property, Plant and Equipment | 1,026 | 1,147 | 1,558 | |||
| Goodwill in BS | 8,225 | 8,225 | 8,225 | |||
| Previously written-off acquired goodwill – add back | 0 | 0 | 0 | |||
| Other acquired intangible assets in BS | 0 | 0 | 0 | |||
| Previously written-off other acquired intangibles – add back | 0 | 0 | 0 | |||
| Long-term debt | 0 | 0 | -200 | |||
| Other non-current liabilities | -91 | -91 | -90 | |||
| Net non-current assets for operations | 9,160 | 9,281 | 9,493 | |||
| OTHER ITEMS TO CONSIDER | ||||||
| Defined benefit pension deficit | 0 | 0 | 0 | |||
| Internally generated intangible assets capitalised to BS | 9 | 15 | 21 | |||
| Investments (in shares, bonds, etc.) | 0 | 0 | 0 | |||
| Operating lease non-cancellable commitments | 715 (est) | 715 | 1,361 | |||
| Preference share capital | 0 | 0 | 0 | |||
| Minority interests in profit | -22 | -14 | -152 | |||
| Minority interests in net assets | 245 | 256 | 270 |
| £’000s Year end April | 2015 | 2014 | 2013 | 2012 | ||||
| INCOME STATEMENT | ||||||||
| Profit after tax | 831 |
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