SpaceandPeople – an update following a meeting with the directors

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Last October I bought a handful of shares in SpaceandPeople’s (LSE:SAL). On the surface it seemed like a good bet for my Modified price earning ratio portfolio, but I had not met the directors and so was not willing to make a substantial commitment. A few days ago, I attended the AGM in Glasgow.  There were only two shareholders present and we sat around the boardroom table.  The directors were very welcoming and more than happy to answer my questions, which took over an hour to go through.

I was impressed by their answers (on the whole). But since I last wrote, financial distress risk has risen considerably because it reported annual losses, cash outflows, worsening gross profit margins and a poorer turnover to asset ratio.  This means I cannot buy any more shares.

But it could be that they will report improvements in these metrics over the next few months.  If they do, I can reconsider.  In the mean time I need to prepare.  I do that by updating the analysis with the evidence in the Annual Report to December 2018 together with what I learned from the meeting.  I’ll use many of the same paragraphs and format I used last year (see Newsletters dated: 24th Oct – 1st Nov 2018), but with the new elements added.

What it does

Spaceandpeople finds businesses looking to promote or sell something at high footfall locations such as shopping malls, major rail hubs, city plazas and airports, and then coordinates with the owner of the property the set up of say a temporary sales outlet or a promotional kiosk (videos and other promotional material on a display box, with a person signing up subscribers or potential buyers).

For example, a vehicle manufacturer might put a car and lots of marketing material in a shopping centre or at a London railway terminus to raise awareness; The Economist magazine might hire a stand for advertising and signing people up; a food vendor might take a three year contract for a SpaceandPeople stand on the main concourse at a shopping centre; a Christmas card seller hires a stand for the month of December.

The main business is in the UK, where it started, but there is also a German operation that 5-6 years ago was doing very well but has been unprofitable for a few years now. An Indian off-shoot is virtually autonomous (it’s not clear if it generates profits for Spaceandpeople).

Cyclically adjusted price earnings ratio

The company’s shares have fallen 92% in five years to 12 – 14p (MCap £2.4m – £2.7m).  Given that most of the last decade the company was profitable we end up with a very low cyclically adjusted price earnings ratio.

Note in the calculations below I have completely ignored the directors preferred measure of earnings which excludes various exceptional items. The managers had a habit of entrepreneurially going for new businesses, e.g. setting up in France or creating S&P+.  This is commendable, but some things work, others don’t; it’s all part and parcel of being a young company feeling its way.

The problem arises in how they treat the money spent on ventures.  The prudent approach would be to take these costs as they are incurred and write them off against profits that year.

But the managers prefer to store up the costs on the BS, then when they have confirmation of failure, they write them off as exceptional, discontinued or restructuring costs – they even use a lovely phrase “retrospective costs”.

In the following analysis I have no truck with all this finance

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