Sold SCS Group (SCS:LN)

This morning SCS Group released their preliminary results for the year. They were very good, with both revenue and profits up on a like for like basis compared to the previous year. The company had cash of £58m and free cash flow of £16m for the year, which is extraordinary considering the market cap is £94m.

So you might be wondering why I sold. It was due to the profit warning at the end of the announcement.

“Since the start of the current financial year, trading conditions have been more challenging, with like-for-like order intake falling 7.6% for the period from 28 July 2019 to 29 September 2019. This period was impacted by the record temperatures experienced by the UK across the August bank holiday weekend and the increasing political and economic uncertainty we are currently facing in the UK. “

A 7.6% fall in like for like sales is huge for a company with 5% profit margins in a competitive sector with not much in the way of brand moat. We have no idea how profitability will be affected, but I think it’s safe to say it will be considerable and could even push it into a loss maker.

The valuation is still somewhat attractive but I have been burnt too many times holding onto shares with shrinking profitability. It is hard to know where the end is and some never recover. For that reason I have sold all my shares and will keep an eye on it to see when sales start to recover and what kind of profitability they will end up at. When it’s stable I will consider buying back in as the dividend yield is very attractive.

Due to the large margin of safety in the share, it has only fallen around 8% on this news and I sold for roughly the same price I bought at months ago.

Disclosure: Author has no position in SCS:LN