Drinks distributor and Bargain Booze franchise owner Conviviality (CVR:AIM) is nursing a crashing share price hangover on Friday. The shares slump 19.5% to 99p as the fallout from yesterday afternoon’s profit warning, which caused a 59% share price collapse late on Thursday, continues to reverberate.
Crewe-headquartered Conviviality, the company behind the Bargain Booze and Wine Rack chains as well as drinks distribution giant Matthew Clark, warned that adjusted EBITDA for the year to 29 April will be roughly 20% below current market expectations, prompting analysts to take red pens to forecasts.
A TOXIC MIX
Issued at 3.07 p.m. on Thursday afternoon, the warning reflects two main factors. Firstly, a ‘material error in the financial forecasts of the Conviviality Direct business,’ - consisting of Matthew Clark and wines and spirits wholesaler Bibendum - ‘which means the EBITDA for the current period will be impacted by approximately £5.2m.’
Secondly, Conviviality Direct’s margins softened across January and February, despite sales and orders trending ahead year-on-year. Management is prudently assuming margin weakness continues for the rest of the year.
Conviviality, led by CEO Diana Hunter, insists ‘a number of enhanced controls and disciplines have been introduced to address this and management believes that appropriate corrective actions are in place.'
Furthermore, Conviviality stresses it hasn’t seen ‘any material weakness in overall demand’, despite the more difficult UK consumer backdrop, and that cost saving initiatives ‘remain fully on track’. The AIM company also leaves its 29 April year-end net debt guidance unchanged at ‘approximately £150m’.
ANALYSTS VIEW
In January, half year results from Conviviality failed to impress as they indicated the company required a materially stronger second half performance to deliver full year profit growth.
Shore Capital drinks sector sage Phil Carroll downgrades his recommendation from ‘buy’ to ‘hold’. For this year, his adjusted profit before tax (PBT) projection falls from £53.3m to £38.4m, with 2019’s PBT reduced from £65.9m to £43.9m.
In a blow for income investors, the forecast dividend is slashed from 13.5p to 5.7p for this year, while next year’s payout projection drops from 14.9p to 6.2p.
‘What is most concerning for us is the causes and materiality of the 20% downgrade to full year 2018 EBITDA expectations,’ writes Carroll. ‘Management highlight a forecasting error alongside lower than expected margins in January and February 2018, both relating to the Conviviality Direct division.’
‘We believe value remains in the business in the medium term but the question is: Can it be delivered by management or a potential suitor?’, asks Carroll, who says ‘the magnitude of the downgrade, the reasons and the timing given the year end is only 6-7 weeks away has damaged management credibility, in our view, as highlighted by derating of the stock alongside the downgrade to earnings.'
Carroll hasn’t downgraded his rating to a ‘sell’ recommendation because he sees the problems behind the profit warning as fixable.
‘Furthermore, we believe the business model works and remains relevant. The group commands a strong route to market so has value, in our view, with the potential to generate more value in the future.'
‘Management will give a pre-close update on 27 March, where we hope to get more clarity on the issues,’ says Investec Securities. ‘Given a number of unanswered questions currently, such as where the £5.2m error falls within the forecast and how long it will take to reset the margins, we place our forecast, target price and recommendation under review.'