Henderson European Share Discussion Threads

[jtcod] 24/4/2006 23:33

Regarding the profit forecasts GT, it's worth considering also that we hand chose a chunk of stock from Andromeda at fire sale prices. You can bet we already had an outlet for anything we bought. I would expect a nice fat return on that chunk of stock.

JT

[jtcod] 24/4/2006 23:20

I was lazy GT.

I took it from the accounts for 6/2005 item 10:

Options dilution 1,397,628

[goonertone] 24/4/2006 23:04

JTC

Yep should have been plus I have amended.

Do you know the terms of the options?

GT

[goonertone] 24/4/2006 23:04

JTC

Yep should have been plus I have amended.

Do you know the terms of the options?

GT

[jtcod] 24/4/2006 22:28

Top post GT, thanks for sharing it with us.

On the shares front, I've been working on a dilutive figure of 19.4m after taking into account the outstanding directors options.

The £1.3m times 15 % = £1.5m: I take it you meant + 15 %?

Regarding the £1m saving, I think you are right GT about the extra £500k because the company said £1.5m was saved but took off an anticipated hike in energy costs of £500k.

Yours is a very fair appraisal of the situation imo.

Thanks again.
JT

[goonertone] 24/4/2006 21:17

As I stated earlier I was about to set up a new HET thread when JTC set this one up. Just out of interest I have posted the opening summary that I was going to use. Its a bit longwinded so please feel free to skip it

HET - is it beauty or the beast?
Home Entertainment Corp was originally the owner of the Choices chain of video shops which has now evolved into a business that still owns the choices stores, numbering 220 but also a fulfilment business offering stock management and distribution services to businesses both small and large.

The Beauty is the fulfilment business
The Beast is the retail side

Market Cap is currently £12 mill

HET shocked the market in November 05 with a profits warning stating that a loss of £3.3 million before tax would be incurred for the first half of 06 due to poor high st trading, stock write offs and exceptional costs relating to the setting up of a choices tv channel on sky.

HET now has the following divisions:
ChoicesUK local – provides a fulfilment services to small convenience stores acroos UK and ROI
ChoicesUK direct – incorporates website sales and fulfilment services to bigger companies
ChoicesUK TV – selling directly to the public via sky TV
ChoicesUK stores – operates 200+ stores renting videos/dvds and selling dvd's, computer games/hardware, mobile phones
Mosaic – own rights to a small number of dvd titles

The question is why invest now in a loss making company who's shares have been in decline since 2002.

Bull Points
Fulfilment Business is profitable, secure and growing
Rental is a declining part of the product mix
Andromeda Ent brought from receivers to bolster fulfilment division
Trading statement and interims both stated retail now profitable
Cashflow positive
Expansion of fulfilment business via purchase of goodwill & assets of Andromeda Ent
Cost cutting exercise to be completed ahead of schedule to the tune of £2mill per annum.
Imminent uptake of blu-ray/HDdvd

Bear points
Retail is weak currently
Internet rentals eroding high st business
DVD Piracy
Advent of downloadable films

There are other bull and bear points but these are the main ones and one that could be either(Peter Gyllenhammer)

Below is a posting I made a while back that sums up most of my thinking on HET:

Is HET worth £1.50? On current results no but then I'm in this at the moment on a momentum/stock squeeze play but I was originally looking at getting in on a recovery play. The question is recovery from what? A terminal decline in turnover but managing to streamline ops to revive profits or a one off rebranding and refocusing of the business to return to growth and profitability?

18 million shares at 1.50 would give a market cap of £27 mill. Say PE of 10 then profits before tax(ignore available losses etc) need to be £3.9 mill approx.

Is this achievable? Leaving out the download and blu-ray arguments( ie any loss from current formats can be replaced by new formats) then it is nigh on impossible for 2006 but if the finals show a return to profit in the second half then 2007 is a distinct possibility that this can be achieved.

Lets look at the profit centres based on info in the interims.

Mosaic
Lets just stick with what weve got £100k profit for year.

Choicesuk local
£860k on 8000 outlets with ROI growing rapidly. Roughly equates to £20k per annum per outlet. There were 250 extra outlets in 28 weeks to 17th Dec. Say 250 more for second half and average of 250 for 2007(ie 500 for year spread evenly) therefore 8500 @ £20k = £1,700,000.

Choicesuk Direct
£670k in 28 weeks to 17th Dec. A period which included the internet business adversely affected by delay in launch. Once up and running growth to continue and 3rd party agreements to expand on.
This appears to be the current business driver both through the internet and more importantly the managing and fulfilment of third party businesses. These additional third party arrangements should give income from fees etc without the costs of investing in stock .
Lets say slight growth in second half and then 15% growth in 2007 as internet site and third party agreements kick in.
£1,300,000 + 15% = £1,500,000

Choicesuk TV
Set up cost below budget and written off as exceptional in 1st Half of 2006.
Agreements in place to run third party channels thus earning fees to set against running costs and thus reducing risks of incurring losses. Expect to make profit in 2007.
Finger in the air on this but say £500k

Choices UK Stores

Now for the problematical one. £1.5 mill loss in 1st half but now restored to modest profitability. Rebranding would now appear to be near the end and the improvement in like for like performance towards the end of the half was greatest in the restyled stores.
Once the remaining 10 stores that have been earmarked for closure have gone there is £500k of savings per annum.
However as has been stated mild winter, a hot dry summer and the world cup could adversely effect the stores more than the other parts therefore I will err on the side of caution and say break even for 2007(though I think with luck with good mgmt and mix of products £100k per store is possible or £3 mill)

Therfore we have £100k + £1,700k + £1,500k + £500k + £0 = £3,800k

The above figures do not take account of the £1 million in overhead savings for 2007 stated in the interims. These appear to be for savings in admin and ending of leases and not inclusive of savings from redundancies in the warehouse. 20 staff at £20k plus ni and admin would be another £500k but as there is no proof that these aren't included in the £1 mill I will ignore them

Finally cashflow is stated to be positive in H2 and in 2007 therefore interest due should fall back to previous levels.

To be prudent include a further write off of obsolete stock say £500k

Therefore we have operating profit of £3.8 + £1.0 = £4.8 mill less exceptionals of £500k and interest of £250k = profit before tax of £4.05 mill.

So in conclusion with a lot of what ifs and maybes yes it can be worth £1.50 per share and if they can turn a profit from the high st outlets (personally I think my break even is far to low based on them already appearing to have turned them back to profitability) then £2.00 plus is achievable.

This is the bull argument, rose tinted glasses etc but the question was can it be worth this and the answer from the most recently available evidence would appear to be yes

All comments, derision etc welcomed.

GT

[scout2] 24/4/2006 19:59

miamisteve
sorry last post under my old title. using culchi for the past year

[scout2] 24/4/2006 19:55

miamisteve
While i admire jtc and will always look hard at his investments, i am a long term holder of stocks including ang, udg,dnx,cnm,emh, and php,,all of which would cost me in cgt here in ireland.But although i dont post often i am still learning and appreciate the posts from hornblower, pippen and jtcod etc. Many thanks to you all ,

[jtcod] 24/4/2006 19:42

MS
I am amazed at that.

Did you use the phone to buy? If not, I would recommend you phone your broker give him a buy limit and let him work the deal. That's how I got my 300k.

[miamisteve] 24/4/2006 19:20

Yep. Was one of those days for me, with very little filled. Managed to get 5k of amu and that was it.

Gyllenhammar acquired another 250k, which seemed to take up the overhang.

[jtcod] 24/4/2006 18:30

Guys are you saying you had problems buying shares in HET?

I got mine at 65.5p first try this morning.

Perhaps someone has a large order in or perhaps the institution that was selling has soldout.

[miamisteve] 24/4/2006 18:24

Didn't get a single share. :(

Culchi - Looks like another cod tracker fund?

Won't bother chasing the price up tom. will take a look again next week.

[jtcod] 24/4/2006 17:24

IEC has gone up 60 % in 4 weeks Zoo. They laughed at me on iii 8 weeks ago when I posted that it was due a 'massive re-rating'.;-)

[zooshare] 24/4/2006 17:16

JT...bought 10k today at a premium of 4p above offer. 1x1k is quoted for bid/offer. Well, read as much as I can an happy to hold for a while see how it goes. thanks for sharing your research with us, however this turns out to be.

also topped up with IEC, which is simply relentless! hope it keeps up the momentum

[jtcod] 24/4/2006 17:00

culchi
IEC is a great company, and their P&P reserves could well quadruple over the next 3 years imo.

Obviously I can't make your decisions for you. All I can say is that I sold stock in one of my favourite companies (BUR) to buy stock in HET today. Such was my belief in it's current undervaluation.

[culchi] 24/4/2006 16:41

Thanks jtc for sharing your expertise. My largest holding is in bur which i bought at£2-65. Have since bought amu @81 pence,chns@£1-45 and iec@£7-80 .I was going to add to iec tomorrow as my holding is only 1200 shares. Should i instead use funds available to buy het at present prices. Your opinion would be appreciated .Many thanks for your contributions.

[goonertone] 24/4/2006 16:38

Rec

It took a bit of time when I first looked at this to get my head round what they do. My first instinct being video/dvd rentals from high street stores thats a bit cyclical and subject to weather, world cup etc wheres the stability?

However rentals now account for less than 30% of turnover, although they are a higher margin they are subject to outside influences. The growing part of the business is the fulfilment side. For example they supply dvd's, videos etc to local stores, post offices etc to allow these stores to offer a greater choice of products to their clients. They now supply approx 8,000 stores an increase of 250 stores in the first 28 weeks of the year and made £860k in that period.

They also supply, manage and distribute all of the stock of dvd's etc for lovefilms(an online dvd rental business) and most of the major catalogues like Littlewoods and Grattans.

Movie downloads will have an effect at sometime but blu-ray and HDdvd should keep the marketplace bouyant for a fair few years yet. Piracy is also an issue but new licensing and encryption technologies should have an impact on this in he future.

I haven't even touched on dvd sales, the website, the direct to customer sales etc but I'll stop before people nod off.

It's not all roses by a long shot but somewhere in there there is a profitable and growing business trying to get out.

GT

[recruiter] 24/4/2006 16:06

GT, thats my problem, I just have the "blockbuster" image in my head, although I see Andromeda was a supplier to many leading retailers & the like.
It is tempting, but I am having trouble believing that initially Andromeda will not have a negative impact on earnings.

[jtcod] 24/4/2006 15:55

Agreed GT

Nice to come across you again. If it wasn't for your diligent work on this bb, I probably would not have picked up on the Andromeda situation. Though I was still interested in buying without that dropping in our laps.
Cheers
JT

[Abuse team] 24/4/2006 15:52

Post removed by ADVFN

[goonertone] 24/4/2006 15:50

JT

I was in the process of starting a new messageboard thread for HET and then this popped up and saved me the trouble, thanks.

I could wax lyrical for hours on the pro's and cons of HET as a business investment. All I would say for now is that if anybody does take a look at the company then try to see past the initial image of a blockbuster clone. The profitable part of the business and the driver for growth are the fulfilment businesses of choicesuk local and choicesuk direct and it is these parts that will benefit from any crossover business from Andromeda.

GT

[scumdog] 24/4/2006 15:46

JTCod's started a new thread today.

[jtcod] 24/4/2006 14:29

Rec
When the P/E is this low, long term growth is less of an issue imo. Ben Graham always worked on the principal that a zero growth stock is worth a P/E of 8.5. I think that is a very good rule. The safety is in the purchase price against intrensic value.

I do think we will get meaningful growth though from the integration of Andromeda. Andromeda had a T/O of £70m and was profitable. It just had a bank that killed it's short term cash flow by calling in the £4m overdraft.

As a 'value' investor, I don't need growth but if it's there, well that's just icing on the cake.

As ever all IMHO
JT

[recruiter] 24/4/2006 14:08

I would love to get excited about this one, but just cant. For me it is a really struggling & highly comeptitive sector, that is with, piracy, internet dowloading etc, dying out. It will remain on a low pe for quite a long time I would imagine as it has to be asked "where is the long term growth going to come from ?".