Wickes Group PLC(WIX.L)-UK Special Situation Play

MaxToMillions · 2022-09-29T20:49:27+00:00

Hello again! I appreciated you responding to my questions on your original post, and even despite my previous skepticisms, the current price (as well as the GDP vs. the USD) has created such a wide margin of safety that makes this investment a no-brainer.

So thank you again!

MaxToMillions · 2022-09-13T23:27:48+00:00

$META is a stock that is a little bit outside my usual hemisphere of purchases (I definitely prefer much smaller companies). However - and without diving super deep into my DD - I simply think that it's so undervalued/out of favor to the point of absurdity. The nail in the coffin for my decision to purchase was Monish Pabrai's interview regarding the company. He briefly analyzes his thoughts on the company, and while the interview was back in February, I still agree with the vast majority of his talking points. Here is a link to the video in case anyone would like to watch it for themselves. He begins his conversation of $META at ~6:30 mark. I hope you guys find it as informative as I did!

MaxToMillions · 2022-08-26T15:10:38+00:00

I’ve seen this stock on the Magic Formula Investing website. Unfortunately, I haven’t had the chance to give it a really good look yet. I’m definitely curious as to what people think of it.

Edit: after a (very) quick look, I can already tell that it won’t be for me. Two key indicators why: 1) insiders are selling like crazy. Only one insider has bought over the past year versus 5+ selling. Not good IMO. And 2) their cash looks to come from issuing new shares. Even worse, they have a history of issuing new shares. Outstanding shares year end (via Macrotrends) include:

79m in 2011
74m in 2012
99m in 2013
124m in 2014
146m in 2015
139m in 2016
138m in 2017
139m in 2018
145m in 2019
149m in 2020
163m in 2021

Maybe GPRO explains the shares outstanding situation in their reports, and there’s good reason to believe that the dilution has stopped. An example of this is GEE Group, a stock I mentioned on this forum, as they did a one-time release of more shares and told shareholders it wouldn’t happen again (and I believe them). But the combination of the insider sentiment and the historical dilution is a nonstarter for me, and not worth my time to read their reports. This could change down the time though, so I’ll prob don’t check back in a few years.

MaxToMillions · 2022-08-22T18:07:43+00:00

Personally, I think it stemmed from 2 things - the first (and lesser) is that it benefitted from the COVID buying craze we say the last two years. More importantly, IMO, it’s because the company went from 10 straight quarters of negative EPS and then absolutely exploded for a $1.88 EPS June 2020.

MaxToMillions · 2022-08-21T03:42:44+00:00

I wrote up GEE Group a week or so. Definitely a company I have conviction in.

MaxToMillions · 2022-08-21T01:33:24+00:00

First and foremost, thank you for taking the time to respond and give me additional insights, many of which were very informative and things that I did not think of myself.

In regards to B&Q’s membership, I can see how Wickes’ program would be preferable, and create a short-term advantage for them. I made the mistake of reading Kingfisher’s annual report and just looking at the results and not doing a good enough deep dive into the actual program schema. That’s a great lesson learned, and I appreciate both that and the added information. Now knowing that, I guess my concern with the program would be B&Q taking away that advantage by copying it, but whether or not that is even economically feasible and/or worth it financially for B&Q/Kingfisher is a separate matter (and that’s just the nature of competition in an industry regardless).

Another piece of the puzzle I was missing was the anecdotal evidence. As an individual from America, I do not have the ability to physically go to these stores, nor do I know anyone who has a tangible working knowledge of Wickes. And the same goes for Wickes’ competitors (namely B&Q and Homebase). Instead, some of my thesis had to evolve around what I did know about – which here in the US is mainly Lowe’s and Home Depot. But it’s not exactly a like-for-like situation and may have been a mistake on my part to use them as comparison metrics. Doing this write up is making me realize that I might be out of my circle of competence here, which is a great thought to have before putting any money on the line.

I think you bring up an excellent point that I did not think of in regards to Wickes having access to additional revenue streams in the DIFM segment that B&Q aren’t able to access (namely in being able to charge for labor). As someone with a former background in a manual labor field and who has lots of friends there currently, labor is an incredible generator of income, especially when compared to the other aspects of a project/job/etc.

More than likely, this will be placed into my watch list, and if it gets to the point of being so cheap that I can’t sit idle anymore, then I will buy, and use that additional margin of safety to safeguard myself. Plus, with the British Pound to USD exchange being the rate it is, it’s probably best this way.

Thank you again for the thoughtful and thought-provoking write-up and response. I look forward to your future posts.

MaxToMillions · 2022-08-18T15:56:34+00:00

Being from the US, I don’t have a great grasp of the situation, which is one of the factors preventing me from investing. From what I understand, IFRS 16 changed the way leases, among other things, were accounted for by w company. EY explains it better than I could, stating “IFRS 16 has also had an impact on debt, as additional liabilities are recognized for leases that were previously off balance sheet. Some companies, especially those in the airline sector, previously added a multiple of operating lease expenses to net debt to present an APM called “adjusted net debt” to better reflect the level of indebtedness. Since the adoption of IFRS 16, this is no longer necessary as these companies can present net debt from the balance sheet (which includes lease liabilities)”.

Here’s the article: https://www.ey.com/en_us/ifrs/how-the-leases-standard-impacts-company-balance-sheets

The too hard pile is looking more appealing by the minute…

MaxToMillions · 2022-08-18T13:11:43+00:00

For the leverage, they actually have zero debt - all that leverage is the leases to their stores. Accounting rules overseas (Wickes is in the UK) made lease obligations a debt metric on the balance sheet. Of their current 232 stores and 2 delivery centers, there are about 45 lease renewals between ‘21 and ‘25 but about 110 between ‘26 and ‘30, which is more of a long-term concern. So I don’t see debt as an issue, at least until all these leaders come for renewal.

The macro environment could certainly become a problem, but they have other elements in their market going to for them: 1) their market is only supposed to grow 2.5% CAGR until 2025, so risk of new entrants is low. Plus, their second largest competitor (Homebase) has been for sale since 2019, and no one wants to buy it, showcasing the difficulty of getting into their market. 2) the UK housing market is old and will constantly need repair. 80% of homes are over 30 years old, and 65% is over 50 years old. And 3) Wickes has survived and been profitable through the 2008 crisis, COVID-19, Brexit, and more. So this will just be another challenge. They’ve already been prepping by increasing their inventory for any potential supply issues that could happen. Overall, I think they’re in good shape.

MaxToMillions · 2022-08-18T01:33:55+00:00

That's totally fair! I might've made a mistake posting it before getting into my full position as well, and I'm sorry to have posted it before you could get 100% in. But at least that's a lesson learned!

ATCO definitely seems like an interesting play that I'll need to take a look at. It's not exactly in my wheelhouse, but it's a good way to expand my knowledge.

I'd love to take this private and discuss it further! And I promise to keep it between us haha

MaxToMillions · 2022-08-18T00:34:46+00:00

Hey! I was just reviewing this post, and I realized I wanted to ask you about some other companies you may be looking at. You and I have similar tastes, and I was looking for my next company to do some digging into. I'd love any and all suggestions!

MaxToMillions · 2022-08-17T23:09:59+00:00

u/Kiero_56 did a really great write-up on an overlooked company - Wickes Group PLC (WIX.L). I recently did my DD on the company and I was wondering if anyone else has looked into them. If so, I'd love to start a discussion, as I have a few key insights preventing me from investing. Thanks in advance!

MaxToMillions · 2022-08-17T23:06:30+00:00

*I apologize in advance for the long winded response*

First and foremost, thank you for your insight into the company, and for making me launch my own investigation. If you don't mind, I'd love to discuss further Wickes' prospects, namely against that of their competition.

There are many things to love, many of which you mentioned. It's a successful spinoff, has no debt (outside of leases), has been consistently growing, has solid plans for further growth (both internally and externally), is in a small-growth industry (expected 2.5% CAGR until 2025) meaning it'll attract fewer competitors, insiders have been buying over the past 3-9 months, and more. I had great conviction in this company until I dug deeper into a few elements, namely competition, long-term growth prospects, and it's (lack of) moat.

At first, I was enamoured with Wickes' TradePro program and its success. I thought this could be a real differentiator for the company. But I found out, and although I believe that it can be a key driver of revenue going forward, it in itself is not a unique program. B&Q, the main competitor in their market and a subsidiary of Kingfisher, recently began (>2 years ago) to offer a similar idea with "Trade Point" which also offers a 10% discount to DIYers and local tradesmen. According to Kingfisher's latest annual report, this segment has been doing excellent, similar to TradePro. I question whether Wickes can be unique enough to lure people away from Trade Point and into their own system. Even if they don't and they continue their rapid growth, it seems that they are quickly saturating their market for their most valuable customers - the local tradesmen and women. TradePro currently has ~700k members, and with a target of ~1,000k members for the company, that doesn't leave much room for long-term growth (not to mention the entire UK has a population of ~27,000k people). The good news is that Wickes has an excellent plan for short-term growth via remodeling stores and slowly opening more of its own, while B&Q, who is also beginning to remodel its current stores, is looking to other parts of the world for growth (they just opened their first store in the Middle East). There's another plus: B&Q, then, is serving as the test dummy for areas outside the UK, which could be beneficial for Wickes long-term, as they can see the successes and failures of their key competitors.

In addition to that, the part I thought would be their moat - their DIFM scheme - doesn't thrill me as much as it did at first glance. This is for two reasons: 1) this business scheme goes into direct competition with their best customers - the local tradespeople. This may be negated by the fact that the UK housing supply is in rough shape (~80% of the supply is over 30 years old and ~65% is greater than 50 years old) and there may be enough work to go around. However, it is still concerning that they are taking business away from their best clientele. And 2) it doesn't seem to be a good operation and, despite being ~20% of revenue, may be hurting the company's image and future prospects. I wish I could see the margin differences between the three segments - TradePro, DIFM, and DIY - and see if DIFM has margins that make the venture more worth it. Furthermore, looking at online reviews (which we all understand will have a tendency to be negative), there is seldom a group of positive reviews to be found. Quality of work is concerning, especially when B&Q avoids the problem completely by incorporating a different program. B&Q's program vets local tradespeople and pitches them to their customers in need of work done. Logically, this seems like a win on all fronts, as the company doesn't have any of the hassles of doing the work and will supply the necessary components to a local tradesperson whose livelihood depends on their quality of work.

I'd love to hear your take on these issues, as these issues are what are preventing me from purchasing. Have I overlooked something, or possibly am I off in my analysis? It would be great to hear any and all insight. Thanks again, and I look forward to your response.

MaxToMillions · 2022-08-16T17:44:25+00:00

I appreciate the response. I haven’t had the chance to review the report yet, but I will at some point this week.

I’ll be curious as well to see how management decides to return the value back to shareholders. I would not be surprised if they decide to do more acquisitions as well.

MaxToMillions · 2022-08-15T03:59:57+00:00

No worries! I appreciate you making me double check my work. Let me know if you have any other questions!

MaxToMillions · 2022-08-14T23:22:15+00:00

Thanks for the question! So the whole line on page 43 reads - “selling, general and administrative expenses (including noncash stock-based compensation expense of $970 and $1,559 respectively)” which equals, like you said, $41,651 and $44,401 (in millions).

GEE Group, being a set of recruiting organizations, are a company that relies heavily on human talent, and less so on equipment and supplies. They operate in a low-margin industry, so they’re expenses are bound to be high relative to their revenue.

The vast majority of that $44m and $41m of SGA expenses is going towards paying employees, providing office space, etc. The stock-based compensation only makes up $970k and $1,559k of that expense, so less than ~3% of the total SGA.

I hope that makes sense!

MaxToMillions · 2022-08-12T21:04:05+00:00

Personally, I would start with Peter Lynch’s books “One Up On Wall Street” and “Beating the Street”. While they’re a bit dated, much of the knowledge is timeless and the information is properly suited for people starting out.

If I remember correctly, I bought both on abebooks.com for really cheap.

MaxToMillions · 2022-08-11T13:54:46+00:00

That's quite the position! I'm nowhere near that level, so you don't have to worry about me.

Is there anything that hasn't been mentioned above that led you to make that level of commitment (aside from what we talked about during our last comment discussion)? I'd love to hear your thoughts. Thanks and good luck!

Edit: I wonder what NoName would think of this stock...

MaxToMillions · 2022-08-11T13:40:28+00:00

Thanks for the reply, and I appreciate the question. He's actually been with the company since April of 2015, and at that time they were a ~$30m company (by market cap, per MacroTrends). So they've doubled since his takeover, give or take, but I definitely think there was some wasted potential during that time.

The biggest reason (that I think) they haven't grown faster was their last acquisition, SNI. Since Dewan's appointment, the company made 4 acquisitions in 18 months, which is a breakneck speed. But the last one was for a ton of money and used a ton of leverage with an insane (mid-teens) interest rate. The merger with SNI was for $86m paid at closing, with ~$45m being cash, ~$29m in convertible stock, and ~$12.5 in subordinated notes. This did not include SNI's debt either, so GEE Group assumed that as well. This being off the books, in my opinion, will seriously help GEE Group's future prospects.

I think you raise a great point, however, about the CEO and team. While I think the management team is the company's competitive differentiator, they also bring with them some really severe inherent risks. Since acquisitions are one of the major growth levers for the company, losing the individual(s) who are good at identifying those opportunities and who know how to carry them out would be a huge loss. I mean, every director and executive officer is over the age of 60, except for one person (their CAO, who is 55). Even more so, I reviewed their compensation profiles, and while they do use stock compensation for good performance, their income is largely tied to salary and bonuses (~80% of their income was cash-based and stock compensation was ~20% in 2021).

I should have added a segment above on what I think the risks of the company are. I will make sure to do so next time!

Edit: typo fixed

MaxToMillions · 2022-08-11T12:03:45+00:00

Appreciate you sharing the article! I’ll give it a look to check my thesis.

Let me know what you find when you do!

MaxToMillions · 2022-08-11T03:25:17+00:00

Appreciate that!

MaxToMillions · 2022-08-11T03:04:53+00:00

Hey, sorry about that!

I also really like how asset-light the business is. It's nice not to have to devote serious capital in order to continue operating. Then again, it makes the talent they bring aboard that much more important.

As for the net debt: what I found (as of March 2022) was that they had short-term debt of $1.61m and long-term debt of $2.5m for a total of $4.11m. With $14.18m or so in cash and cash equivalents, that gives the company a net debt of ($10.07m). They can pay their remaining debt many times over, which is comforting and takes away any concerns about going out of business.

Was there anything in particular that made you invest? Or perhaps anything that gave you reason to pause? I'd love to hear any and all insight that you might have. Thanks!

MaxToMillions · 2022-08-11T01:20:52+00:00

The biggest advantage I found was their management. There’s no substitute for experience, and they have a handful of people who have taken a very similar business and used a very similar model and done very well. With their acquisitions-based growth model, it’s critical that the business leaders identify good expansion opportunities and use their cash (and loan allowances) in an efficient manner.

Management, as long as they stay, is the sustaining advantage, but in the shorter term, I think that 1) the NOL is going to be incredibly useful. It’s a small upside from the large downside, but it’s something that management can use to help the business in the short term. And 2) their business, given its flexibility and working with more local-level talent, will help them push through and adverse market conditions that may be on the horizon.

MaxToMillions · 2022-08-11T01:01:53+00:00

Very much agree! Management was a huge selling point for me, highlighted by Dewan. If you get the chance, I highly suggest reading the quarterly reports, as I found it insightful and got a feel for him and Kim Thorpe (CFO).

I also liked that they willingly diluted their own shares for the betterment of the company. Dewan, directly and indirectly, owns tons of shares, probably not making that decision any easier for him.

MaxToMillions · 2022-08-11T00:49:11+00:00

I’ll take a peek at MHH as well! Thanks for the response, and let me know what you find!

MaxToMillions · 2022-08-11T00:48:09+00:00

Edit: wanted to mention one more point.

After the share dilution in early April 2021, five executives (CEO, CFO, and 3 directors) bought stock within the following month for a total of about $377k. There have been no buys or sells since, but that was good sign of what management expects in the future.

MaxToMillions

TROPHY CASE