Fayrewood Share Discussion Threads

[badtime] 09/4/2008 21:08

slipped a bit today ..hmmmm

[puffin tickler] 09/4/2008 06:35

Now is a good time to be thinking of spending 33M if a copper-bottomed bargain can be found? If the FWY top brass have a value it is that. I hope they do not launch into an unwise purchase but in general it is a buyer's market out there.

No position (currently)

[deswalker] 08/4/2008 17:25

Not an accountant aquilla but spend my days digging around for value investments so I'm getting better at reading reports.

The issue under discussion here has been discussed extensively over the years on The Motley Fool and is a quirk of a very high turnover, low margin distribution business like Fayrewood where cash management is crucial. Some people prefer to net off the debtor financing against cash to give the reduced net-cash number. Others prefer to net off the debtor financing against the trade debtors to give the higher net cash number. I'm in the latter camp and obviously would like to see the full £33m returned to shareholders to settle the issue once and for all.

[aquilla] 08/4/2008 15:38

Your logic seems sound, Des (are you an accountant by any chance?). As you say, it looks like the company could still run without the £33m but I suppose it is nice to have a cushion!

[deswalker] 08/4/2008 10:35

aquila - thks for the info.

Not very surprisingly it appears that my logic in post 2508 was correct, although I'm surprised that the figure you were given wasn't the full £15.152m as I calculated in my post.

Those that disagree with the £33m net-cash view say that the company couldn't operate without this method of financing and so it isn't really distributable cash. There is something in this view but it's not one I share. IMO FWY could give back the full £33m to shareholders and run Interface in a perfectly solvent manner. In all honesty the resulting company would command a better market rating because all this confusion about debtor financing would be cleared up immediately.

Personally I'm thinking that a takeover is less and less likely but that NAV are negotiating with the Board how to release as much cash as possible to shareholders leaving us all with a holding in Interface. Not the best scenario but I fail to see why we shouldn't get at least the current share price back in cash for starters with the Interface holding (profitable & below TBV) costing us nothing.

[aquilla] 08/4/2008 10:10

I did talk to the FD about the cash position. He explained to me that some £15.137m of invoice discounting finance is not included in the net cash because it is linked to the debtors of operating subsidiaries. I'm not an accountant but apparently that's the way things are done. The receipts from the debtors (their customers generally settle between 30 and 45 days) would clear this. So basically there is net cash of £33M. Which does make the current share price cheap, imho, especially in view of the takeover talks.

[etarip] 04/4/2008 14:40

Investors Chronicle 4-10 April 2008

Based on Fayrewood's cash pile alone, the shares are worth considering. Add that to the prospect of an offer from North Atlantic Value LLP - even though not exactly imminent - and the shares rate a buy.

[badtime] 02/4/2008 19:10

Bought a few yesterday

[etarip] 31/3/2008 10:53

Gengulphus

Thanks for your reply

[gengulphus] 30/3/2008 15:20

But are any of the losses in the company that is trading? And if so how much?

I don't know - the fact that they have arisen in subsidiaries that have been loss-making for some time could be either because the subsidiaries concerned are trading and making losses, or because they're not trading and making a small loss because of various administrative expenses.

You'll probably need to ask the company if you want to know. As far as I'm concerned, though, the fact that those tax losses have not been recognised means that it's not particularly likely that they'll be usable and so I wouldn't consider themas having any real value.

Gengulphus

[scburbs] 28/3/2008 18:49

etarip,

The losses I referred to were trading losses in the Interface subsidiary itself.

It looks like there are some losses in some of the holding companies which may be equally of use if they can be used to shelter interest income.

[etarip] 28/3/2008 17:02

Gengulphus:

"The Group has tax losses which arose in the UK of £4.1 million (2006: £4.2
million) that are available indefinitely for offset against future taxable
profits of the companies in which the losses arose. Deferred tax assets have not
been recognised in respect of these losses as they may not be used to offset
taxable profits elsewhere in the Group and have arisen in subsidiaries that have
been loss-making for some time."

But are any of the losses in the company that is trading? And if so how much?

[stemis] 28/3/2008 15:35

Yes, I've also operated an offset arrangement between different companies in the same group. We used to charge/credit daily balances at the overdraft rate prevailing at the time. Mechanistically its very easy, especially with online banking. Of course it requires cross guarantees which FWY might not want to give.

Other companies I know used to sweep balances on a daily basis into a head office account and charge/pay interest.

[old boy returns] 28/3/2008 15:01

scburbs - it was some years ago and the details are a bit vague in my memory. As I recall it we used to deal with the transfer pricing issue by charging inter-company interest on the relevant amount much as you would with inter-company loans. Deposits were available for withdrawal providing the remaining balance was sufficient to cover (effectively secure) the level of borrowings.

[gengulphus] 28/3/2008 14:30

Are there any carry forward tax losses associated with the current business?

Open yesterday's results RNS, search it for "tax loss" and you'll find the current position!

Gengulphus

[scburbs] 28/3/2008 14:17

Old Boy Returns,

Interesting. How did you deal with the transfer pricing issue, i.e. one company is getting no return on its cash and another is paying nothing for its borrowings? Did you have some form of payment between the companies to balance it out?

In your situation were the deposits also able to be withdrawn freely?

[old boy returns] 28/3/2008 14:12

scburbs - I have arranged group (ie deposits and borrwings are in different group companies) offset facilities in the past. Agree that they should not be moving surplus cash into IS. The profits IS generate do not justify the level of working capital required and with the low margins in the industry it is unlikely they ever will. A sale of IS at a 25% discount to book value and then liquidation of FWY looks the way to go and I cannot see North Atlantic coming up with an offer which would beat that return to shareholders.

[scburbs] 28/3/2008 13:32

Don't think they will be able to get an offset arrangement when the cash is in a different company.

This is surplus cash and they should be getting on and distributing it (or finishing takeover talks). Personally I wouldn't want them to put the cash into Interface(!) even if it did save significant amounts of interest.

No doubt it would then take time to extract it from Interface again or they might go and do something silly like investing it in more working capital!

[old boy returns] 28/3/2008 13:23

Thanks Schurbs - if this is the case then it is expensive, in terms of lost net interest, for FWY to be keeping a big pile of cash at the same time as having a high level of receivables financing. Seeing as interest should be contributing more to earnings than the trading profits of Interface management should address this. It should not be too hard to arrange a decent offset arrangement especially as banks are crying out for big cash deposits at present due to the credit crunch.

"There is probably also a rate differential between deposits and borrowings."

[scburbs] 28/3/2008 12:51

etarip, Interface had c.£1.4m of tax losses at 31.12.06 (not sure about now).

[etarip] 28/3/2008 12:16

Are there any carry forward tax losses associated with the current business?

[balcony] 28/3/2008 07:55

I did some dummy trades yesterday and over 100k shares were available online at 118.5p.

[scburbs] 28/3/2008 07:37

Old Boy Returns,

Part of the explanation is that €12m was received in December in relation to Banque Magnetique so wouldn't have earned much income. There is probably also a rate differential between deposits and borrowings.

[old boy returns] 27/3/2008 23:35

I have only taken a quick look at the results but the one surprise for me was the fact that financing costs (interest expense) nearly wipe out interest income. With £33M of cash and £15M of trade receivables financing I was expecting a healthy level of net interest income. Does anyone have any thoughts on this?

As an aside it will be interesting to see what (if anything) North Atlantic offer. I struggle to see how a win / win can be agreed with them as it would be relatively straightforward for existing management to liquidate FWY from here and return 140-150p a share to shareholders. For there to be anything in it for NA they would have to offer a reasonable discount on that and if they came in at 125-130p a share I suppose FWY could always call their bluff and say "if that is what you think it is worth we will buy back your 25% holding at that price"

[bhoddhisattva] 27/3/2008 22:23

Stemis: please don't misunderstand me - as far as I am concerned you are a long standing and respected poster in "the other place"!

I am genuinely trying to understand this issue as what should be a simpler company than many - a distributor - ends up being harder to value and be sure of than I expected. Yes I hold FWY and yes I've been hopeful and expecting a higher share price ... and been disappointed.

It seems to me that if this was a high margin business we'd all have a much easier job of disentangling the debt, assets, working capital, etc etc. - the margin and profits would dwarf these. But in this case they're crucial to the understanding and valuation ... now you can see why I'm hesitant to invest in banks and insurance cos. where there is so much subjectivity in my ever so humble opinion as to what is the "embedded value", "estate" and other such arcania ...