It has been a while now since I last penned a piece on G4M, where more of late it has been something of a tail of woe for the business as well as on the share price front.
During 2020 and much of 2021 the shares proved to be a very big winner for me where thankfully, I topped sliced at a considerable premium whilst retaining the remainder.
As the shares retraced after warning the market, I kept close tabs with a view to potentially adding to my position again, although as the markets generally came under bear pressure and consumers became ever more squeezed, I decided to sit on the cash.
Fast track to the present and last week I did add here as I viewed the then price of 92p giving the business a market cap of under £20m a great recovery proposition.
Arguably, it is something of a speculative decision at this point though, given the headwinds that persist across many markets let alone retail, but one I considered worth taking given I view G4M on a longer timespan than the next six months or so.
That said, the Interim results announced this morning were arguably more positive than the share price movement has been suggesting, where it was good to see that a more recent upbeat trend has continued into November.
In order to hear more on how things are going and what the future may have in store longer term for the business, I have once again caught up with management for a chat.
Firstly, it is perhaps worth touching on the current debt issue which has understandably been picked up on various bulletin boards and is a serious point from an investment perspective.
Personally, I don’t like to see a lot of debt on the balance sheet and certainly not in a high interest rate climate, so it was one thing that I have been monitoring closely here.
Speaking with CFO Chris Scott there is an acceptance that debt needs to reduce, but he explains the reasoning as to why it increased, which includes the previous building up of inventories which made sense given the issues with transportation and shipping costs.
Scott points out that brokers Singer and Progressive have slightly differing forecasts on the year end net debt forecast, but adds that a figure of around £16m should not be wide of the mark.
He adds that they are very much focused on reducing debt and the prevailing trend southwards should continue.
The anticipated figure is much more palatable than the current £21m net debt position and the plan is for that to reduce further, which sees Singer pointing to a £13m position next year.
Scott does also mention that they have the freehold property in York valued at £8.5m, £40m of stock, whilst they also have what he describes as an excellent relationship with a highly supportive bank.
So, all in all the position is looking comfortable enough for me going forward, but it will be good to see the number heading lower still.
Of course, it is all about the trading at the end of the day though and CEO Wass sounds as frustrated as investors, in as much that this has been so unpredictable.
He refers to a slow summer due to a number of previously highlighted headwinds, which then saw a bounce in September which in turn was curtailed by the death of the Queen.
However, he says that the positive trend then quickly resumed and this has continued to date into the current month.
Europe, he says has proven pretty resilient, although there have continued to be a few Brexit related issues which they have managed to navigate well enough.
Within the product mix, Wass explains that own brands which enjoy margins of the mid 40% range plus had actually fallen to 43.9%, but they now had initiatives in place such as a new premium end due for launch in order to further drive these along with sales.
The blended product gross margin, which although reduced comes out 30% and although within this other brand margins fell to 26.9% it was still above the 2020 figure.
Additionally, the average order value has increased by 19% to £151.00 which has in part Wass says, been driven by the inflation factor and the passing on of costs.
Looking ahead to the all important Christmas period there is unfortunately no crystal ball, although both CEO and CFO say they are comfortable with the numbers that are out in the market.
The company has a number of plans in place to execute as best as possible on this key period and the current high level of inventory should assist in serving this which will then lead to a significant inventory reduction.
Wass says that going into next year, there are a number of operational initiatives that have already come through and which are ready to extend, which includes the embracing of new and improved finance and payment options.
The AV.com acquisition is also close to an inflexion point in terms of a positive contribution and this is near to delivering on a launch into Europe.
The latter provides for a significant growth opportunity for G4M as although it is already a major player on the continent, it nevertheless has a relatively small slice at present in what appears to be a fairly fragmented market.
The long awaited pre-owned or second hand offering is also now set to launch by the end of March and although that is likely to be a long term project, it nevertheless provides for an additional bow to the business.
Whilst there has been a 32% decrease in unique website users which sounds considerable, there was in contrast a positive increase in the overall conversion rate to 4.9% which is a meaningful measure.
Worth noting too is that mobile traffic continued to increase and that is a trend that is likely to continue on an upward trajectory.
The big unknown for now is how G4M will perform in the forthcoming crucial Christmas period and with the impending onset of the World Cup arguably an added distraction shopping habits may well not be so prone to single day events.
In terms of its market and customers it is perhaps fair to say that historically those seeking musical instruments and sound systems etc., are often better placed financially and the recent positive autumn sentiment in a difficult economic climate perhaps bears this out.
Both Wass and Scott sound as optimistic as one can be on delivering on the forecast numbers, which don’t appear to be too demanding, even in choppy waters.
The company will update in January on this crucial period and investors will perhaps be better positioned in terms of visibility and direction although no doubt uncertainty looks likely to reign for some time yet.
As far as the broker expectations go, Singer is forecasting full year 2023 revenue at £155m with adjusted pre-tax profit of £1.3m giving EPS of 4.9p. This moves to an anticipated £170m of revenue next year with pre-tax profit at £4.9m and a big jump in EPS to 13.4p.
As I write, the shares are trading up 5.5p to £1.01p which sees G4M standing on a PE of 20 which falls to just 7.5 for next year, which if achievable looks extremely attractive.
The issue of course is that the company has had such big swings which were largely skewed by the positive lock down effect, but which given the deteriorating economic climate has reversed abruptly.
For that reason some may elect to see further evidence on the delivery, although the current valuation looks discounted enough to me.
Looking at the medium to longer term, the shares remain even more attractive to me as the business is essentially an ongoing growth play and to that end does have plenty to aim for, where as things eventually reverse on the inflation and recessionary front it looks well placed to deliver once again.
Perhaps one for the patient and more speculative investor, but a stock that could quickly rerate on further positive news and sentiment.