It's Really Mild.

Firstly as I am you may have noticed, if you live in the UK, it has been really mild recently for the time of year. For example I heard on the weather the other day that the overnight low was going to be around 12 c which is more like a night time in July not December. Mind you given our summers are sometimes like winter perhaps that's not so surprising!

This is normally bad for clothing retailers as their winter lines then fail to sell in the expected volumes. Thus today we have had the first, presumably of a few profits warnings, from clothing retailers. Bonmarche (BON) the Women's wear retailer in warning about their profits. said:

"In the Company's Interim Results report published on 23 November, the Board stated that, provided trading conditions normalised for the remainder of the financial year, its expectations for the full year would remain unchanged.

Trading conditions during December, particularly since "Black Friday" on 27 November, have been very challenging, and have not normalised. The Board's view is that these trading conditions are likely to continue for the remainder of the winter season and it has therefore revised its profit expectations for the current financial year. Given the ongoing volatility of trading conditions, the Board considers it likely that the PBT will be within the range of £10.5m to £12.0m.

Since they are also referring to Black Friday I guess this could also have wider implications for the retail sector beyond just clothing, but given the weather I'd expect other clothing retailers downgrading their expectations. This could include Next which features in the Compound Income Scores Portfolio (CIS) and I note they have been weak this month. While WH Smiths should be less exposed unless the Black Friday sales have really damaged the Christmas trade for everyone.

Meanwhile there was a really mild update today from another CIS Portfolio holding, RM Group (RM.). I say really mild because at least it wasn't a profits warning, but a very brief statement saying that they were trading in line with expectations. They also updated on their cash balances, which were up, as they had guided, to £48.3m versus the £43.1m that they last reported.

Against this they updated on their Pension deficit after the latest triennial review. They say this saw it fall from £53.5 in 2012 to £41.8m at the 31st May 2015, although strangely this is up from the £30m that they mentioned in their interims which were also to the 31st May 2015. I guess this reflects a more detailed look at the liabilities and perhaps some conservative changes to the assumptions underlying it. They also mentioned two payments of £4m so I guess £8m could come off the cash balances and the deficit recovery payments remain at £3.6m per annum up to 2024 rather than 2027 presumably reflecting the £8m they are putting in upfront.

So this is the main change since I last wrote this one up in detail and the higher deficit could therefore detract slightly from the value case. Since the new deficit figure and the remaining cash, after the recovery payments, should roughly match lets just look at it based on the market cap rather than a reduced enterprise value due to the cash. This is more conservative, although it could argued that if they had to wind the company and Pension fund up today that it would cost more than that, but it seems a reasonable compromise as it is still a going concern.

On this basis they have a market cap of around £140m and they are expected to have turnover this year of around £180m on which they are currently making margins of close to 10%. My rule of thumb on this is that each 1% of margin is usually worth around 0,1x on an EV/ Sales basis. So here taking the market cap. as the EV due to the pension deficit we get an EV/ Sales ratio of 0.8 suggesting that it could be perhaps 20 to 30% under valued on that measure.

Taking a possible operating profit of say £18m based on those turnover and margin assumptions gives a decent  EBIT/EV yield (Mkt. Cap. in this case) of 12.85% and also suggests they are cheap. While more conventional measures such as PE and yield are around 11x and 3% at the current price of 165p or so. The share price and estimates are all pretty much unchanged since I did the detailed write up mentioned above, so it seems I was right to call it rather mundane, although to be fair the market is down by about 4% over the same time frame.

Thus, although the pension deficit is now slightly larger than at the interim stage, this is at least settled for the next three years until the next review and the cash payments etc. seem to have offset this effect. Even ignoring the cash to net off against the Pension liability still leaves them looking quite good value based on the metrics discussed above. It still scores 97 on the CIS & coincidentally the same on Stockopedia's Stock Ranking system.

However, despite this, the price is characteristically flat again this morning so it doesn't look as though the market is going to re-rate it any time soon, but I guess time will tell and it seems patience will be required with this one.