LVCG Profit Warning: Shares Drop Amidst Lower Revenues

Live Company Group (LON:LVCG) today issued updated guidance on profits, and the news was bad: results for the FY2020 are due to be below market expectations. The share price, as expected fell some way on the latest LVCG profit warning:

This share price was down 25% on the day, but the long-term chart shows the real declines. Late 2018 was the real year of excitement for this share, as its price was pushed up past 80p: a colossal valuation based on the fact that Live may continue to expand in what may be an uncontested (at present) market.

LVCG is also a popular share on the bulletin boards, frequently updating investors on its progress. Its share price performance over the past couple of years would not doubt have attracted those investors looking at momentum as briefly threatened to be a ‘blue sky’ stock. This seems to have been put on the back burner for now.

What’s gone wrong at Live Company Group?

The bad news comes in a very detailed RNS. At least the summary gets us into it:

Whilst the Group has demonstrated strong growth in 2019, results for year are expected to be below market expectations.

Reasons as follows:

Whilst the Group’s touring and event divisions exceeded expectations, with 71 shows and events occurring in 2019 against a projected 60, results for 2019 have been adversely impacted as a result of lower than expected license and content fees from China, fewer corporate builds and lower returns from the BRICKLIVE Show at the NEC, Birmingham.

The company blame the macro-economic environment in China, but I am less sold on this.

In addition, there was a delay in certain revenues that were expected by the Board to be received before the year end and that are now expected to be received in Q1 2020.

This is more promising, but the markets don’t agree, or that the level of revenues is not significant. We have further details:

Revenues of £5.5 million for 2019 (2018: £4.9 million from continuing activities, of which US$1.6 million was a one off single contract for China), representing an increase of £0.6 million (12%). EBITDA £0.7 million (2018: loss £0.4 million from continuing activities) – an improvement of approximately £1.1 million.

This also seems like good news on the surface, considering the one-off nature of the revenues in the previous year. But the growth rate may disappoint investors and due to the nature of the events, many are likely to be short-lived.

Live Company Group: Money from Entertainment

Research on this company is quite scant. There is very little on Research Tree for instance, and although the company has been popular with speculators it appears that some have vested interests in its fortunes. The company specialises in putting on entertainment/educational events through BRICKLIVE, which are ‘edutainment’ displays revolving around the infamous Lego. This is not a bad place to start, as Lego cuts across language and cultural barriers and is known the world over.

The shows can be disseminated in a number of different ways, from small to large exhibitions, from temporary to permanent stands. This flexibility has allowed it to gain popularity over the world. Revenues from shows and events range from direct customer payment, (for example the flagship BRICKLIVE show) or payments from mall owners to house exhibits.

And the list of exhibits is impressive: LVCG have ownership of a number of related Lego world records such as the worlds largest Christmas tree, longest bridge, largest ship among others. In terms of financials. this has not been profitable so far, with admin expenses swallowing up revenues made. This is common in growth companies, and revenues have to grow quickly in order to break even.

The company has a large exposure to Asia:

Which makes the warning about China slightly more significant. It is curious why the UK should be flat: Lego is clearly a popular enough pastime, although trying to make this a profitable one for the company may be more difficult. Europe is where the growth is and may be the largest segment in a year: most of the shows booked for the next year are in this region.

Other important factors to note are that LVCG has no official association with Lego. The company made a large acquisition at the end of the 2018, paying £8.5m for Bright Brick Holdings, a model design company by way of share issue and debt. This could be argued to be highly complementary for the company as it now becomes a producer and provider, a form of vertical integration. This was reflected in the interims: the number of ‘touring shows’ has gone up exponentially, no doubt due to the fact that the company now owns more models, going from 70 to 650 almost overnight.

The group is also heavily owned by its founder, David Ciclitira who owns almost 40% of shares.

LVCG: Finances

It is a given that the company need to ramp up their revenues in order to become profitable and give shareholders returns. There is limited financial data as the company is a much different one today than it was two years ago. But it may be prudent to see whether this will fall foul to cashflow issues. The last trading update before the warning was positive, and the group was trading profitably at an EBITDA level.

However, there is still a need for cash. Net cash outflow became neutral in the last trading statement, but only because of working capital movements. A RNS on 16 December revealed that a new loan facility for £1.0m had been arranged. The previous loan was expensive, at 9% interest.

Current assets at the last annual report were much larger than the liabilities, although the proportion of cash in the assets is quite small and the vast majority is inventories. The company holds some £6.5m worth of Lego bricks which strikes me as maybe quite difficult to liquidate if needed. Given the cash position it does appear that there is little room for things to go wrong.

Are LVCG shares good value?

I quite like Live Company. It does offer something genuinely different at present in a field where there may be few competitors. Whether this can be profitable in the long-term is another matter. The obvious point is that most of the advantages lie outside of the company. It is quite unlikely that Lego may go out of fashion, and it seems implausible that Lego would be able to stop their events, but if Lego chose to compete this would put LVCG at a big disadvantage.

Staffing costs also appear relatively high. The wage roll was almost £1.5m for 26 employees last year: an average of £57,000 per employee. Given that 12 work in administration, and 2 in sales, the pay for a Lego ‘artist’ seems to be quite a bit. Perhaps they are worth the money, but then it also could be the case that the valuable assets of the company could leave at short notice, and may be difficult to replace.

Whilst the owner seems to have his values aligned with the shareholders, last year he was paid over £500,000, most of it for ‘consultancy’ fees. That kind of figure seems way out of kilter for a company this size, and his shares would have been more valuable had he chosen to not bill for these services. On its own it does not seem like great backing of the prospects and getting these type of ad hoc bonuses seems like a recurring theme recently.

Given this I am no so sure that shareholders are very high up on the priorities list. But on the flip-side it may be possible that Live have a decent business here which can be successfully upscaled. Given the lower valuation here I do think this is quite a binary situation where investors either make multiples of their investment or lose it all; at the moment I would like to see more. 2/5.

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