Great Western Coffee Shop

From a financial forum which I peruse and I think refers to an article in a recent edition of The Times.

http://www.iii.co.uk/investment/detail?display=discussion&code=cotn:FGP.L&it=le

The text of which I've cut and pasted below and the First Group share price as I write is 81.20p.


In my opinion the article is pretty shallow. The article cites high debt levels, a lack of dividend for 5 years and poor trading.

Let's look at these in turn. High debt levels, absolutely the company has too much debt and has struggled to turn profitability into cash. This is always a red flag for me, as with Carillion profits on paper can easily vanish with some write downs. The company has though promised this year that the business will move to be significantly cash generative. Let's see. Equally important is that the company was saddled with really high interest rates on their bonds, mainly over 8%. These are being refinanced down to under 5% which should have a very positive impact on cashflow and eventually help with debt reduction.

The lack of dividend is often cited as a reason for the low share price and failure of the companies turnaround strategy (more on that in a minute). I disagree, the company has too much debt and needs to refinance the debt at lower levels. A dividend in my opinion shouldn't be an option until the debt refinance is complete, as without that process going smoothly (and the early indications are encouraging as one refinance is almost complete) the whole future of the company is in jeopardy. They could declare a dividend to sweeten investors, but really don't think it is the right thing to do. They need to rearrange the debt, have a few years of generating cash, show that trading is stable and then review if any excess can be paid to shareholders.

Now we come onto trading. Let's be very clear management have not met their own targets when the rights issue was announced. They back then spoke of double digit margins. They haven't achieved this at all. The business is diverse with low margins. They seemingly have built in next to no allowance in their budget for any unusual events and therefore year after year profits are impacted by any small event. They need to change this to have a good forecast of lost days due to unforseen events and report on whether events were above or below this rather than blaming any poor performance on a few days of snow.

I would add that in addition I am personally surprised that the Directors are still achieving bonus targets as the KPI's they are achieving seem to have not created any value for shareholders.

However with all this said, I still think the Times article was lazy, a case of kick somebody when they are down. Yes the company in many ways is a huge disappointment and I could spend all days picking holes in it. The company though trades at around p/e of 9. i.e. the market has already priced in the fact that this company has a history of under performance. I am not saying it will, but if the company could sell off Greyhound and demonstrates that it is generating serious cash and paying down debt then this one could really fly. The trouble is there is no reason to have any confidence in this company being able to achieve what it says it will. Not sure it's a sell though, its a p/e of 9. For me it's a speculative stock, one that may disappoint for a lifetime or may someday come good. Not sure which it will be but on current valuation could be worth a try.

I'm a tad surprised the discussions don't major on the earnings from bus/train sectors. The trading statement/updates generally do, so its not that the info isn't out there.

Bus seems to generate more profit than trains not surprisingly. Both GWRs current problems & the loss of franchises recently bears that out. I'' not sure its the right tie therefore to be selling of Greyhound? But if they can't refinance, they may find themselves in trouble eventually. I think they're a hold at the moment