EBITDA at the owner of Bargain Booze and Wine Rack now looks set to come in around 20% below market expectations, due to a couple of issues.

There had been a “material error in the financial forecasts” for the firm’s Conviviality Direct business, which means a £5.2m hit to EBITDA — and margins at the business have been weakening.

Predicted net debt for the year remains in line with previous guidance of £150m.

The share price is now down a massive 75% since the start of 2018 — and as my colleague Roland Head observed, the company’s directors bought a shedload of shares just after Conviviality’s first-half results.

Debt worries

Normally, that would make me think the shares were oversold and possibly cheap now. But a further update on Wednesday has made me seriously doubt that — and it’s all to do with that debt figure.

Conviviality assures us that it is “currently in compliance with its banking covenants” which, among other things, require the company to maintain covenant debt at less than 2.5 times the last 12 months adjusted EBITDA. That could now be coming under pressure, and the firm has engaged PwC to assist in discussions with its lenders and with HM Revenue & Customs. 

Dividends were forecast to yield 9.6% this year, rising to 10% by 2020, but I’d say they’re almost certain to be slashed now. Conviviality is in bargepole territory for me, at least until the current mess is sorted.

Stunning growth

I might not buy tumbling Conviviality shares, but I do like the look of Yu Group (LSE: YU) even after its share price has more than trebled in the past 12 months.

It’s certainly one I’d love to have bought a year ago, but is there still growth left in it? I think so, and news of a successful placing of 1.2m new shares does boost confidence. Priced at £10 for a modest discount to the market, the result has been a small dip in the share price. 

The independent energy supplier is still only a small fish in a big pond, and though 2017 revenue almost trebled to £47m, that’s a tiny amount compared to the big players in the market. And we’re already looking at healthy profitability, with an adjusted operating profit of £3.1m.

Only just starting

I see room for a lot more expansion, and consumer sentiment does seem to be swaying away from the big firms at the moment. I’m also minded of the success achieved by Telecom Plus, which offers all-in-one energy packages under its Utility Warehouse brand — Telecom Plus has been strongly growing its earnings for more than a decade.

Looking at growth fundamentals, Yu does seem attractive. Prospective P/E ratios are high right now, but forecast earnings growth of nearly 60% this year followed by 45% next year would soon start bringing them down. And PEG ratios of 0.7 to 0.8 look very tempting to me.

I do wonder why the company is already paying a dividend when it’s raising fresh capital. Long-term cash is an attractive feature of Yu’s dividend strategy, but I reckon it could have safely waited another year while accumulating cash.

But that’s not enough to put me off, and I see a long-term buy.

The post Why I’d sell 10% yielder Conviviality plc to buy this soaring growth stock today appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The bad news is a little surprising, not least because the firm issued an in-line set of half-year results at the end of January. This was followed by directors buying £583,000 worth of shares in the market.

Perhaps we should have been suspicious about such buying, which looked co-ordinated to me. You’d certainly have to pay me to buy the shares after yesterday’s news.

What’s gone wrong?

The company said adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) is now expected to be 20% below forecasts for the year ending 30 April.

Two reasons are given: The first is an error in the financial forecasts for its Conviviality Direct wholesale business, which will reduce EBITDA by £5.2m; The second is that margins in the wholesale business have “softened across January and February”.

The company said sales and orders have been maintained, so this suggests to me that costs have risen for some reason.

Although it’s surprising that such big problems have surfaced with less than two months of the financial year remaining, that’s not my biggest concern.

Why I’d steer clear

Broker notes I’d seen prior to yesterday’s warning suggest that adjusted EBITDA for the current year was going to be around £70m for the current year. A 20% reduction takes this down to about £56m.

The company expects net debt of £150m at the end of the year, which implies a net debt-to-EBITDA ratio of about 2.7. That could be a problem because, according to January’s half-year results, the firm’s banking arrangements require this ratio to stay below 2.5x.

If the company breaches this limit when it’s next tested, its lenders could force it to raise fresh cash from shareholders in order to reduce debt.

Although the shares offer a forecast dividend yield of 12%, in my view this is almost certain to be cut. The shares look like a gamble to me at current levels. I plan to steer clear.

Another stock I’d sell today

My next stock is estate agency group Countrywide (LSE: CWD), which issued a grim set of results yesterday. These were ably covered by my Foolish colleague Ian Pierce, who spotted that the group’s net debt-to-EBITDA ratio has risen to a worrying 2.97 times.

Today, I’d like to explain a little more about why this is so risky for shareholders. As with Conviviality, Countrywide’s debt is subject to a net debt/EBITDA leverage covenant set by its banks. The company hasn’t disclosed its covenants, but we do know that its lenders “agreed an amendment to its leverage covenant” in February.

Despite this helping hand, the firm says it’s still at risk of breaching this covenant if it doesn’t achieve its forecasts for the current year. Worryingly, Countrywide says it would “be unable to meet its liabilities as they fall due” without the support of its banks.

This tells me that if market conditions don’t improve, there’s a good chance the group will have to tap shareholders for fresh cash this year. For this reason alone, I rate the shares as a sell.

The post 12% yielder Conviviality plc isn’t the only turnaround stock I wouldn’t touch with a bargepole appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With all the uncertainties surrounding the Brexit process I find it reassuring that SThree is not over-dependent on economic conditions in Britain in order to thrive. Overall gross profit increased by 4% year-on-year with an acceleration to 8% in the fourth quarter. Digging deeper, that result was driven by an 18% lift in the USA, 9% from continental Europe and a telling 14% decline from the UK and Ireland, suggesting a fragile home market.

Opportunity in uncertainty

However, I don’t think we’d be seeing such a strong showing on value metrics if there were no uncertainties in the air. Chief executive Gary Elden sounded confident about the outlook saying: “Looking ahead to 2018, the momentum of our Contract business and the strength of our performances in the USA and Continental Europe leave us well-positioned for further growth.” He pointed out that 71% of gross profit now comes from the company’s “more resilient” contract business.

City analysts following the firm expect earnings to increase around 5% in 2018 and 18% in 2019, and I reckon one component of that growth could be recovery in the UK market if Brexit uncertainty begins to wane. Meanwhile, the directors held the dividend firm at last year’s level and today’s share price close to 368p throws up a dividend yield of 3.8% to collect while we wait for further growth to materialise.

In another interesting development, the share price of Conviviality (LSE: CVR) plunged more than 12% this morning as the firm reported reduced earnings with its half-year results. Maybe we are looking at an opportunity to buy into a decent growth story at a better price.

Growing market share

The firm earns its living as an alcohol and impulse products distributor and today reported revenues 9.2% higher than the equivalent period a year ago. However, the gross profit margin is down 0.3% resulting in adjusted profit after tax falling 1.6% and adjusted fully diluted earnings per share falling 5.6% compared to last year.

No one likes to see profits falling, but chief executive Diana Hunter explained that the firm “made deliberate choices to successfully grow market share and enhance the quality of future earnings by agreeing long-term contracts with our larger customers and securing new national account customers.”

I think it’s reasonable to give up a little margin for long-term contract security, and ongoing market share gains could restore profits in the end as volumes increase. The directors seem confident about the strategy, increasing the interim dividend by 7.1%. At today’s share price around 295p, the forward dividend yield for 2018 runs at 4.6% or so, which looks attractive given the progress the firm continues to make with revenue growth. Today’s rebasing of the share price coincides with an increase in contract security for the underlying operations. Slippage in profits could prove to be transitory over the long run, and I reckon ‘right now’ is a good time to examine the case for investing in Conviviality. 

The post 2 top quality and value stocks I’d buy right now appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Kevin Godbold owns shares in SThree but not in Conviviality. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Massive gains

Back in January, stock in Nottingham-based Games Workshop traded at 730p. Fast-forward to December and the very same shares change hands for almost 250% more.

A beneficiary of the weak pound (75% of sales come from outside the UK), the £815m-cap business released a plethora of positive updates during 2017 as it began to reap the benefits of its strategy to focus on its core product and engage with dedicated customers sharing its “Hobby gene“. Even regular, uber-cautious statements from management on the possibility of uncertain trading conditions going forward weren’t enough to stop the share price charging upwards.

While not performing quite as well, Conviviality still handsomely rewarded its owners over 2017. Starting off at 220p, the shares had almost doubled in value by October. Despite falling back slightly by the end of the year, a rise of 80% in just 12 months is still anything but shabby.

In its most recent trading update for the six months to 29 October, the Crewe-based business revealed a 9.2% rise in group revenues to £836m compared to the same period in the previous year, with decent growth seen in all of the company’s business units (Direct, Retail and Trading). According to CEO Diana Hunter, AIM-listed Conviviality underwent “significant change” over the period, introducing systems designed to “future proof” the business. 

The question, however, is whether either is worthy of investment at their new, far higher valuations?

Still worthy buys?

In December’s half-year update, Games Workshop estimated that sales of around £109m had been achieved over the period to 26 November with operating profit hitting roughly £38m. When it’s considered the latter was pretty much the same for the whole of the previous financial year, the good times certainly look set to continue for a while yet.  

Although it might be said a lot of this news will already be priced in, I wouldn’t be surprised if many investors stuck with the company for now, particularly given the reasonably high probability of decent trading over the festive period. A price-to-earnings (P/E) ratio of just under 16 also doesn’t feel excessive even if, admittedly, its niche market makes comparing Games Workshop to other stocks somewhat problematic. So while its multi-bagging days might be over, I believe it’s still a great pick for those hunting quality companies offering sizeable dividends.

Conviviality’s outlook also continues to look positive with the company performing in line with management expectations. That said, the firm has stated that full-year profit will be more weighted to the second half of the year as a result of the phasing in of cost savings. 

Trading at 17 times forecast earnings and sharing a similar market capitalisation to Games Workshop, Conviviality is certainly not the bargain it once was. Nevertheless, one could argue that recent earnings growth — coupled with its diversified operations and a solid 3.5% dividend yield — still make it an appealing option, even if the likelihood of it replicating its performance in 2018 remains fairly low.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In a half-year trading update today, the company said it “continues to perform in line with the Board’s expectations.” However, the shares are trading over 3% down at around 410p. Is there anything to be concerned about or is the dip simply an opportunity to buy a slice of the business at a lower price than yesterday?

Growth prospects

The group reported revenue for the 26 weeks to 29 October 7.9% ahead of the corresponding prior period, with growth across each of its business units. Management’s strategy of improving the quality of the store estate and the number of multi-site franchisees looks to be working well and elsewhere it was encouraging to hear of an increase in sales to large national account customers.

The market’s cool response to the update is doubtless down to a “more sequential” rollout of a software system across the group. The company said the result of this phasing will be that the associated cost savings will be more weighted to the second half of the financial year than previously anticipated.

I don’t consider this to be a major issue. Conviviality has potential to deliver strong organic growth from its existing businesses and also opportunities to make targeted acquisitions. A current-year forecast price-to-earnings (P/E) ratio of 21.5, falling to 19 next year, and a starting dividend yield of 3.3% lead me to rate the stock a ‘buy’.

Uninvestible?

I’m far less enthusiastic about the outlook for Internet of Things (IoT) firm Telit Communications (LSE: TCM). I was bearish about this company long before it emerged in August that its founder and CEO Oozi Cats and his wife, Ruth Cats, were Uzi and Ruth Katz — fugitives from fraud indictments in the US in the 1990s.

Mr Cats has departed the company and presumably Mrs Cats has also abandoned her position of ‘art curator’ at subsidiary Telit Wireless Solutions (assuming she and the Ruth Cats of a LinkedIn profile are one and the same). I’m not sure every IoT firm worth its salt has need of an art curator and for me this and other matters raise serious questions of integrity and governance at the company.

Some of my other major points of concern are that finance director and now interim CEO Yosi Fait sold 488,567 shares at 310p (netting himself £1.5m) on 28 June. This was two days before the company failed to meet one of its banking covenants — a fact that was only revealed in a note in the firm’s half-year results in August. Does this also put into a different light a £39m placing in May to fund “several identified acquisition opportunities … which the Company will look to execute in the near-to-medium term”?

Other matters, including news last week that the Financial Conduct Authority is making preliminary enquiries into the company — albeit it is “not under formal investigation” — only reinforce my view that Telit is uninvestible right now. As such, I rate the stock a ‘sell’.

The post One multibagging FTSE AIM All-Share Index stock I’d buy, and one I’d sell appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Can the shares continue to rise? Sure, assuming the company can provide evidence that it has managed to build on last year’s excellent performance when it delivers half-year figures on 24 July. 

The only problem with this is the fact that 2016 was such a superb year for Fevertree. April’s full-year report highlighted a 73% increase in revenue (to £102m) and 97% rise in adjusted EBITDA (to almost £36m). Beating these figures in 2017 is no easy task and any sign that momentum is slowing could see many holders jettison the stock from their portfolios.

To further muddy the investment case, Fevertree’s popularity as a growth stock par excellence following its tendency to beat earnings estimates has left it trading on a gravity-defying 61 times forward earnings.

And given that anything over, say, two is indicative of a stock trading at a fairly high price relative to the predicted growth of the underlying company, Fevertree’s price-to earnings growth (PEG) ratio of over 5.2 also implies that the stock looks horribly expensive.

A more appealing option

If, like me, you’re put off by the possibility of Fevertree’s crown slipping, an alternative stock with decent growth credentials might be drinks wholesaler, distributor, and retailer, Conviviality (LSE: CVR). Today’s full-year results were certainly encouraging.

Thanks to a series of acquisitions (which all appear to have been integrated ahead of schedule), the £550m cap business grew revenue by 85% to £1.56bn in the year to the end of April, with adjusted pre-tax profits rocketing 111% to just under £46m.  

Broken down, the company reflected that all areas of the business had performed strongly.

A 6.4% increase in revenue (to just over £1bn) was seen at Conviviality Direct (its wholesale unit) with a total of 235 customers being added over the course of the year. 

Trading under its Wine Rack and Bargain Booze brands, revenue at its retail arm rose 6.1% to £378m. A total of 39 new franchisees joined the company last year, bringing the total number to 352 (and over 700 stores). 

In Conviviality Trading — which serves festivals and outdoor events — sales hit £146m — a rise of 1%.

Given this more-than-adequate performance, you might expect the shares to be trading at a fairly high valuation. This simply isn’t the case. Right now, you can pick up its shares at just 13 times forecast earnings. 

Remember Fevertree’s sky high PEG? Conviviality’s is 1.8 for 2017. That means investors will be getting access to earnings growth an awful lot more cheaply at the latter.

In addition to its reasonable valuation and growth potential, it’s also worth highlighting that the Crewe-based company’s shares come with a forecast 4.3% yield for the new financial year, nicely covered by profits. Given that levels of free cashflow at Conviviality climbed 349% to £51m by the end of the last financial year (which permitted the company to raise the full-year dividend by no less than 33%), I wouldn’t be surprised if the stock also becomes a core holding for many income investors in the years ahead.

The post Why I’d dump a 10-bagger for this small-cap growth stock appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Those expectations seem robust and in a trading update released this morning, they confirmed that current trading is strong. So why is the company’s valuation so modest?

Emerging growth

At today’s share price around 325p, Conviviality trades on a forward price-to-earnings ratio of just under 13 for the year to April 2019 and the forward dividend yield runs at almost 4.4%. Those predicted forward earnings should cover the payout a comfortable 1.8 times, making the firm look like a good candidate for those seeking a decent income from their investments as well as a shot at share price growth driven by rising earnings.

What I like most about Conviviality is the way the firm is transforming itself from its origins as a franchised off-licence business into a drinks wholesaler and distributor. Driven by a focused strategy, new growth appears to be emerging from the seedbed of the old business, which looks set to boost investor returns in the years to come.

The firm took bold action to enter the market by acquiring Mathew Clark in October 2015 and  Bibendum PLB Group in May 2016. Today’s update suggests the integration of both firms is progressing well.

The new divisions each delivered sales growth over the 52 weeks to April. The Direct division delivered a 6.4% sales uplift compared to the year before driven by a 1.6% increase in outlets and a 4.8% uplift in sales per outlet. Retail pushed sales up 6.1% and Trading managed a 1% increase, which the directors put down to new customers recognising “the differentiation they can access from Conviviality’s events and experiential marketing business.”

Positive change

Chief executive Diana Hunter said in today’s update that after coming to the end of an unprecedented year of change “our focus will continue to be on improving the business and ensuring that benefits are realised from our greater scale, as we drive efficiencies for the Group and greater service for our customers.”

As well as entering the distribution arena and reshaping itself, Conviviality also made several key management appointments over the previous year, to bolster its new strategy for growth. Positives are encouraging and I think investors could benefit from  Conviviality’s increasing size driving growth and momentum in its markets.

Much of the recent acquisition activity was funded by raising money on the stock market by issuing new shares. However, net debt on 30 April stood at £99m, which the firm says is “comfortably below Conviviality’s net debt target of twice the value of annual earnings before interest, tax, depreciation and amortisation (EBITDA).”  Borrowings seem to be under control, but it’s worth keeping an eye on debt levels if any more acquisitions materialise.

The post An amazingly cheap growth and dividend share to consider now appeared first on The Twelfth Magpie.

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• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.