The Works
grossly mispriced?
By Manuel Maurício
January 17, 2022
Symbol: WRKS (LSE)
Share Price: £0,568
Market Cap: £35.5 Million
* I would like to thank Clark Square Capital for helping me understand the ins and outs of this business.
A few weeks ago I wrote about The Works, a UK retail company.
I ended my write-up saying that the stock could be trading for 3.5x Free Cash Flow and that I would be taking some time to go over my numbers. Diogo Gonçalves was left waiting for the conclusion.
Wait no more, my dear friend.
The management is guiding two sell side analysts who are estimating £14 million in operating profits (EBITDA) for the full year. That translates into a valuation of 4x Free-Cash-Flow. VERY CHEAP.
So what we must ask ourselves is “Is that guidance reasonable“?
Let’s start with the revenue.
In the first half of 2021, the company had two-year Like-for-Like sales increase of 14.5%, and two-year sales growth of 17.9%. The management mentioned that online sales had been approximately double those of 2020.
That means that the company has done £114 million in sales in the first half of the year, approximately £28 million coming from online and £86 million coming from stores.
If we annualize the online growth, we get to £56 million and if we say that total revenue growth will come down from the 17.9% to, say, 15% we get to £259 million in revenue for the full year.
The revenue is the toughest part to estimate. Because most of the costs are fixed, any small variation in the revenue line will have a big impact in the profits. I believe that I’ve kept it conservative.
I’ve asked a friend to send me some pictures from inside the stores of The Works prior to Christmas. I don’t have photos of prior years to compare these to, but it looks like the store that he visited had traffic.
Then there’s a whole bunch of costs to bear in mind. I believe these are easier to estimate than the revenue. I won’t go into each single cost line, I’ll just leave you with a picture of my model so if you want to reproduce my math you can do it.
*Prior year numbers may not be comparable due to IFRS16 adjustments.
Conclusion
I get to Net Income of £3.7 million and Free Cash Flow of £5.3 million (D&A is higher than Capex).
That means that, at today’s price 0.57 share price, the stock is trading for 6.7x FCF. That’s cheap, even for retail.
As mentioned above, the company is guiding two sell side analysts to £14 million in EBITDA. That would mean roughly £8 million in Free Cash Flow or a valuation of 4x FCF. Very cheap.
So the question now is, why is this cheap?
No one really knows, but I can try to guess a few reasons: Because it’s retail, because it’s the UK, and because the operating leases mess up most of the screeners.
This isn’t a stock that I would like to own for a long period of time. Although this business is similar to Five Below – a great business – it hasn’t proven to be as successful.
The Works is a cheap value stock that might re-rate upward in the short term.
Are my projections correct? Probably.
Will the stock revalue upwards? I hope so. It should.
Although there’s uncertainty, I like my odds here.
That’s why The Works will be entering the Portfolio today at close.
Risks
- The business performance might get worse without investors ever seeing the stock price re-rate.
- The company might have not been able to source the goods needed for the holidays season.
I would like to hear your anonymous opinion!
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.