Stanley Gibbons occupies a unique market niche with plenty of potential.
Some might consider stamp specialist Stanley Gibbons' (LSE: SGI) fall from grace in 2008 as ironic.
The stock market turmoil has led to alternative assets being touted as safer homes for your money, and stamps are invariably mentioned alongside wine, forestry, paintings, and trophy wives as unusual places to stash your cash.
Forget investing in black gold or murky banks -- Penny Blacks are where it's at! With the GB30 Rare Stamp Price Index having increased by 39% in 2008 alone, you can see the appeal.
Stamping out optimism
Some investors considered Stanley Gibbons well-positioned for a flight to alternative assets. As the oldest stamp dealer in the world, it's the blue chip of philatelic finance.
Stanley Gibbons is behind the GB30 index. It produces stamp catalogues based on its proprietary numbering system, runs a renowned shop in London, and sells investment products enabling you to put money into stamps without you having to source, trade and store them.
But investors in Stanley Gibbons are buying an interesting and risky £36 million business -- not a stamp collection.
True, with over £11 million in inventories (mainly stamps, but also autographs and similar collectibles) and its fund, retail and publishing operations clearly dependent on stamps too, the company's fortunes are obviously linked to the performance of this alternative asset class.
But the soaring GB30 index didn't prevent Stanley Gibbons issuing a profit warning in January, and subsequently reporting falling sales and profits over 2008.
It didn't protect the share price either, which dropped from 250p in 2007 to 82p in February.
Sticky business
Forget then the steady price appreciation apparently offered by stamps if you're considering an investment in this AIM-listed small cap.
Rather, Stanley Gibbons is an entrepreneurial company looking to use its brand and expertise to build an unrivalled niche in an asset class it believes is under-recognised.
Over five years, earnings per share have more than doubled, although the path hasn't been smooth and EPS growth is complicated by everything from Jersey tax regimes (the company is listed there) to lumpy sales:
| Year | Revenue | Pre-tax profits | Earnings per share | EPS growth | Dividend per share |
|---|
| 2004 | £10.1m | £3.7m | 5p | 37% | 2p |
| 2005 | £13.7m | £2.8m | 9.3p | 88% | 3p |
| 2006 | £16.7m | £3.8m | 11.1p | 19% | 4p |
| 2007 | £20.2m | £4.5m | 13.8p | 25% | 4.5p |
| 2008 | £19.4m | £3.7m | 13.6p | -2% | 4.75p |
Source: Digital Look
Last years' sales slowdown was blamed on the turmoil of 2008 and the subsequent recessionary climate. It turns out the wealthy don't rush to buy pretty and rare bits of paper in a meltdown, and the directors' will hopefully tone down such suggestions in the future.
The other big impact last year was the requirement to exclude £3.4 million of sales of a certain investment product that offered a 12-month moneyback guarantee.
This highlights a potential risk -- Stanley Gibbons has sold various investments offering capital back guarantees and a minimum return over several years. It's not clear to me from the accounts and website what impact any downturn in stamp price appreciation would have on fulfilling these obligations.
There's been some debate about whether now is a good time to get into stamps (champagne isn't the only bubbly alternative asset). You can question too how reliable indices such as the GB30 are over the short-term. If deflation kicks in or there's some other clear threat to stamp price growth, I wouldn't hang about to find out.
Cheap and cheerful
More positively, the £3.4 million in deferred sales should provide a boost to profits when they crystallise.
Six-month results to the end of June suggest Stanley Gibbons is back to growth, with turnover up 18% to £9.6 million and profits before tax of £1.4 million. And all the deferred income is yet to come.
Analysts are now looking for 16.45p earnings per share for 2009 and a dividend of 5.5p, rising to earnings of 18p and a dividend at 5.79p in 2010.
At 144p, that puts Stanley Gibbons on a PE of 8.75 for 2009, dropping to 8 in 2010, and equates to a great PEG rating of 0.35. The company has negligible debt.
Do the funky Gibbons
Clearly, plenty could go wrong. While Stanley Gibbons is in a class of its own among stamp dealers, trading is done elsewhere on eBay and the company commands only a tiny fraction of the global market.
More focus on direct sales and its website seem to be paying off on that score, and Stanley Gibbons is also building its own online trading platform. The risk is it proves a white elephant, but a step-change in Internet activity could be transformative -- stamps are easy to post worldwide and the Stanley Gibbons' name could make this the centre of international stamp trading.
Another potential game changer is a regulated institutional investment product in development, although again it will be non-trivial to deliver.
New senior hirings in the past year are meant to help. Beefing up management also saw over 600,000 share options granted last month at the not-very-taxing price of 127p. They begin vesting in 2012. Together with existing options there's a potential dilution of 4% dilution outstanding -- not too bad compared to some, though I'd have preferred tougher hurdles.
Go for growth
With the London Festival of Stamps coming in 2010 -- bringing more media buzz and stamp buyers flocking to Stanley Gibbons -- and that deferred income set to boost profits, the next 12 months looks good. A re-rating to a P/E of say 12 -- equating to a share price north of 200p, factoring in the expected profit growth -- seems very feasible.
The long-term prospects are potentially excellent. The cheque is hardly in the post, but for braver investors looking for a cheap growth share, Stanley Gibbons could deliver.
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Note: Owain owns shares in Stanley Gibbons.
