United Carpets $UCG.L

I’m back to doing a little investing at the moment, so hopefully will have more posts in 2017 than the last year.

United Carpets is a small UK based retail chain that sells carpets and beds. Usually retail is highly volatile and in this case very linked to the property market which is doing quite well at the moment (and that could change). But United Carpets is different in that it franchises, and only has a handful of its own stores. But still, margins are low and administrative expenses high. Operating margin has been improving in recent years but still sits at just 7%.

The hook

It made £1.2m net profit in 2016 and the current enterprise value is £6.8m, or 5.7x. Its profits are not declining and are in fact increasing slightly.

Good points

  • It has a strong return on capital of 30%
  • Has net cash of £1.8m (compared to a market cap of £8.6m)
  • Peter Cowgill is the chairman, a name I immediately recognised from JD Sports, which is one of the best retailers in the country and whose performance has been stellar over the last 10 years when direct competitors have gone out of business.
  • CEO owns 47% of the company, so his interests are aligned.
  • Nice dividend yield of 4.5%
  • Graham Neary, an ex-fund manager turned commentator I follow, is long.

Bad points

  • Market cap is only £8.6m, which means it’s illiquid. Bid/ask spread is 10%.
  • No growth – there has been some in the last year but over the last few, revenues have been fairly stagnant.
  • Susceptible to an economic downturn.
  • In 2012 a number of the franchised stores had to be closed because they were basically insolvent. Since then there has been no increase in the number of franchised stores. This could happen again in a downturn.
  • This share has rarely traded at large valuations so is unlikely to do so in the future. It has also surprised negatively on earnings once before.

So what’s the company worth? I’d say a P/E of about 8.5 excluding cash, which would be a share price of 14.6p. I wouldn’t say it was worth more than a 10x P/E unless some significant organic growth started to become evident. That would put an upper range of 16.8p.

The ask is currently 10.75p, which gives a 26% margin of safety. I’ve initiated a small position, 2.7% of portfolio, as it is susceptible to downturn and so I expect there may be better buying opportunities in the future. I don’t expect this share to be a two-bagger or better, but over a few years I think this could do nicely if the economy doesn’t go sour.

Disclosure: Author is long UCG.L

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

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