Yachting services company GYG today posted its second profit warning in the space of a few months. The share price has endured a torrid time recently, losing close to 50% off the back of its first warning. Today’s reaction was little different, as the share price was marked down another 40%. The share price stands now at 40p, a fraction of the initial price.
At under £20m, GYG is a very small-cap share. It also has scant history on the markets, being listed for under 2 years. The share price has been relatively stable until this year, when these two profit warnings have really knocked the lights out of it. From a near high of 150p in May, the company is worth less than a third of it just 6 months later.
Their business is relatively uncomplicated: they supply, design, and maintain superyachts under a variety of brands throughout the world. This would seem to be a decent business to be in: superyachts are a global phenomenon, being a status symbol for the ultra-rich. They would be largely unaffected by bigger macro-factors.
They initially debuted on the AIM market in July 2017, and raised a modest £6.9m which was used to pay off loan notes and also in the acquisition of subsidiaries. With double digit revenue growth expected, the shares seemed popular.
The trading update did not beat around the bush, and it was bad news for both revenue and profits:
The trading environment in the second half of the financial year has proved challenging and as a result, the Group now expects to report revenue and profit for the year ending 31 December 2018 significantly below current market expectations. Revenue is expected to be c.€44.0m resulting in an EBITDA loss of approximately €(1.2)m.
This is quite a spectacular fall: FY17 revenue was 62m, EBITDA 1.4m. H1 revenue was 25.2m so the full year result shows an extension of the decline.
There was also bad news for the dividend:
In light of this, the Board is taking a more cautious view in relation to future years’ revenue and earnings. The Board also believes it is in the best interest of the Company not to pay a dividend in the current financial year, however it is the Board’s intention to return to the dividend list at the earliest appropriate opportunity.
Dividends were modest in any case, but is a sensible step.
The board did offer some reasons:
· A number of projects being delayed which were planned for H2 2018. Some of the revenue relating to these projects should be recovered in 2019;
· Owners choosing to extend the use of their yachts in the current Caribbean season, given the hurricane disruption in the region last year;
· Late decisions being made on some very large and complex projects causing delays;
· Increasing work scopes resulting in more planning in order to execute certain projects; and
· One shipyard facility undergoing annual maintenance resulting in decreased utilisation.
And reiterated that conversion of the existing pipeline of work was not as good as anticipated, but some should be recovered next year.
The story here is rapidly crumbling. A couple of years ago it did look like their business could be scaled up. But, it has proven to be anything but. The group reports traction in gaining market share in the New Build sectors, and profitability on the maintenance side has been dogged by regulatory and operational issues.
Profits and operating margins have actually declined from 2014-2017, while revenue has increased:
This is not the trend of a company that has significant pricing power in the market. There is something to suggest that GYG are suffering from the same woes as many other contractors: prices agreed up front with unspecified costs after; or simply gaining market share via aggressive discounting.
Other aspects of the business do not inspire much confidence. Net cash is down and net debt is up. At a value of 10.5m this is rapidly approaching half the book value of the company. Unless trading improves this may be heading for choppy waters. The loan facility is for 13.7m EUR so has headroom, but the financial reports contain the line:
With these results it does seem that the end year might be interesting. The half-yearly report mentions that facilities had been increased, but with no mention of covenant.
Balance sheet wise, there are around $20m of goodwill and intangibles out of a total base of $52m. A good chunk of shares are spoken for by institutions, including Woodford Investment Management (22%).
This doesn’t look in a good situation to me. There is no real reason to believe that factors affecting yachts might persist for another few years. And even if they don’t, could GYG turn this to their advantage? A massive pipeline means very little if there cannot be a decent profit in it. One way to chase that double digit revenue increase is to simply cut prices, which in turn has cut profits. Nobody is impressed, at the end of the day.
The financial aspect doesn’t look good: seemingly little room to acquire a new divisions, and the share price too low to make a worthwhile equity raise. It would not surprise me if covenants were breaches in the future.
This has all the hallmarks of those IPOs not designed for the average man. The previous debt holders got paid off, owners get an exit, and funds like Woodford get some more diversification. These are tough business conditions but it is fairly tiresome to hear the same old story of the growth story not being the same as promised, in some cases falling a long way short in a surprisingly fast amount of time. 1/5.