Shares in troubled stamp and collectibles dealer Stanley Gibbons Group (LSE: SGI) rose by 3% today, after the firm announced two property deals that will raise cash to reduce the firm’s £17m net debt.
Gibbons has sold the lease on its flagship Mayfair premises and a neighbouring property for £2.5m, which should result in a £2.4m in total debt. Part of the firm’s Madison Avenue premises in New York has also been sublet to reduce cash outgoings.
The overall effect is expected to be a £1.3m annual reduction in cash outgoings and a corresponding increase in profit. This is the firm’s first step towards a cost-saving target of £5m per year.
However, while today’s statement is good news, I’m not sure it’s a good enough reason to buy the shares.
Deep value, or a trap?
Stanley Gibbons shares currently trade at a 38% discount to their last reported tangible net asset value of 23.9p per share. This asset value is based on the purchase cost of the firm’s inventory of rare stamps, coins and antiques.
In theory this should be a good buying opportunity. However, my reading of Stanley Gibbons’ interim results is that the firm has seen a sharp downturn in sales to Asian clients. It could be forced to cut prices in order to stimulate demand. The true cash value of these tangible assets isn’t certain.
In my view, cost-cutting is only part of the challenge facing the firm. We also need to see some improvement in sales performance. For this reason, I think it’s too soon to buy.
Debt pressure is rising
There was more bad news from Xcite Energy (LSE: XEL) this morning. The firm confirmed that it won’t be able to repay $135m of bonds due on 30 June 2016, unless it finds a new funding partner. As yet, Xcite has not been able to find a partner willing to refinance its bonds and fund the development of Xcite’s Bentley field in the North Sea.
The company said today that it is having “continuing discussions with bondholders”. Xcite’s bondholders know that they have the upper hand, as Xcite has zero production and no revenue. I expect bondholders to push out discussions until Xcite is forced to default on 30 June. The shares will then be suspended and the bondholders will be free to decide on the best way to recover their money from Xcite.
Xcite’s reassurance today that Bentley’s proven reserves have a discounted net present value of $2.3bn is not sufficient reason to invest, in my opinion. Xcite couldn’t find a partner to develop Bentley when oil was trading at $100 per barrel. I’m not sure they will be any more successful now that oil is under $50.
Xcite’s assets may end up being sold to a trade buyer to repay some or all of its bonds. Alternatively, the firm may be recapitalised by issuing a large number of new shares in exchange for its bonds. In either case, the value of the existing shares would be likely to fall sharply, possibly to zero.
Indeed, I believe further losses are almost certain for current Xcite shareholders, so rate the shares as a strong sell.
Unfortunately, both Stanley Gibbons and Xcite face serious challenges that could result in further losses for shareholders.
