Bear and Bull

Equity Analysis

Author: Brandon and Daniel


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Stock Summary

French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates in around 50 countries around the world. It operates retail stores and concessions in the United Kingdom, Europe, United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include TOAST, Great Plains and YMC.

Bull View – Daniel

French Connection has had a torrid time in the last 5 years, losing on average £3 million a year. This sustained period of poor performance has possibly created a buying opportunity in the stock. Looking at the balance sheet as of July 2015, it can be seen that the Net Current Asset Value (Current Assets – Total Liabilities) of the company is £35.9 million. This compares favourably to a market cap of £27.2 million. However, it is important to note two things:

  •   Inventory contributes £37.1 million towards the NCAV
  •   Lease obligations of £145 million do not appear on the balance sheet

The value of the inventory for a fashion retail company such as French Connection relies upon consumer tastes and demand, and in the fashion world these change constantly. However, I believe that the risk of a serious write-down (greater than 25%) to the inventory of French Connection remains low due to the strength of the brand (in particular the FCUK branding) and that the current market cap provides a modest margin of safety in the event that a write-down occurred (with a write down of less than £9.9 million, the market cap is still greater than NCAV).

Lease obligations would be considered a large liability if the company were to cease operations immediately. Even if this were to be the case, French Connection maintains stores in very attractive locations throughout the UK and so there is a strong possibility that the company could reassign the leases. In the more likely scenario that French Connection continues to operate, the lease obligations are less of a worry.  The company can carry on trading at the more profitable stores, and allow leases to expire at the less profitable locations.

Although the firm is struggling in high street retailing, the wholesale and licensing segments are performing well. If the firm can effectively restructure their retail business, continue their strong performance in wholesaling and licensing, and keep up with the latest fashion trends, then this could be a successful investment. The downside is limited by the healthy balance sheet, but in a return to profitability, the upside could be very rewarding. Currently investors have lost faith in French Connection due to the frustrating performance over the last 5 years, but if strong financial performance returns to the company, the market could potentially apply a healthy P/E multiple to the stock in the future and provide good returns to an investor who buys in today.

I will now offer one final perspective on this investment by assuming French Connection is 3 separate companies; a profitable licensing business, a profitable wholesale business and a highly unprofitable retail business. If you then take the view that they can exit the retail business as leases expire (4-year average lease expiry time) then you will be left with two profitable businesses. These two businesses currently generate operating profit of £21 million – a healthy number for a company with a market cap of £27.2 million. Therefore a sum of the parts valuation would imply the shares are undervalued.

Bear View – Brandon

I will be looking into reasons for not investing into French Connection and try to find out if the market has put the correct valuation on the firm. French Connection is a company that can be split down into 3 key business areas: Retail, Wholesale and Licensing. Two of which provide the firm with profits whilst the other (Retail) is a drain on the firm’s resources.

As French Connection themselves state, a key driver for the company is the ability to produce attractive garments that consumers wish to purchase, this leaves the firm have no long term economic moat. Variations in the success of future collections makes projections of financial performance difficult to make. This is well highlighted in the first half of 2015, with retail operations making a £11.1m loss (£7.5m loss in 2014), French Connection say this was due to the disappointing performance of the spring collection. This is an outcome that has the potential to be recurring thus making the performance of the business variable. Recurring losses will also close the gap between NCAV and share price.

The firms Wholesaling operation made a profit of £5.5m while Licensing made a profit of £3m. These operations I believe would be valued at a strong earnings multiple, a multiple on these earnings would only need to be around 3.2x to reach the firm’s current market cap. This shows that investors have low confidence in the future performance of the Retailing operation. This leads me to question the motives of management, after a number of consecutive years of loss in retail, why hasn’t the business returned to profit or closed the retail operation? I believe that management place too much value on the retailing side of the business and that the retailing operation will continue to erode profits and consequently shareholder wealth. If the firm does return to profit then a healthy return on investment is there to be made, however I believe this is speculative and doesn’t provide a consistent return and thus would advise against any sizeable investment in French Connection.

Large lease obligations are also an important risk. Should the company finally decide to close its retail operations, lease obligations could close the gap between share price and NCAV, reducing the margin of safety in any investment.    


French Connection is not a well performing business. We believe, however, that there is an investment case based upon the net assets the company possess. They have a strong brand that under  correct management can provide investors value. The company also has a strong balance sheet that provides a margin of safety to an investment. With a floor in the share price that we believe to be around 18p a share and a large yet undeterminable upside that would come with a turnaround in the business, we believe the risk/reward profile is strong enough for a 5% investment in the company. We will regularly review this position as future financial and trading news is released by the company.  

Disclaimer – This site is purely for an educational purpose and we do not advise using our analysis as any sort of financial guidance.


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*Our DCF valuation model is currently being refined.

Stock Summary

The Mission Marketing Group (TMMG) are a UK centralised marketing firm who are responsible for a great range of marketing and advertising campaigns. More recently TMMG have been expanding out of the UK market, growing to include agencies in Asia and US. David Morgan the current chairman took over in 2010 when the firm restructured the board. Previously he was responsible for the founding and growth of TMMG’s largest agency ‘Bray Leino’, and is well regarded industry wide. When the present board took over, the firm had a high level of debt, which it has since reduced to a respectable level of leverage.

Bull View – Brandon

In this section I will be discussing TMMG from a ‘Bull’ viewpoint. I will be focusing particularly on the financial performance and acquisition policy of the company.

Over the past financial year TMMG has seen a strong improvement in the activities of the firm boasting a revenue increase of 7% in 2014. With a turnover increase of 1%, this would suggest a narrowing of 3rd party costs and thus improving margins; this focus on reducing costs has been carried forwards throughout the firm. This increases investor comfort and thus also firm profits, which is an attractive attribute to an investor. TMMG’s margins are now better than all but one UK based marketing firm. Over the long term the firm with the greatest competitive advantage should achieve comparatively excellent results both in periods of trouble and expansion, TMMG has a small advantage of this type resulting from the low cost approach enveloped from management. Seldom will the firm with the highest level of cost control suffer the greatest in a market-wide downturn.

The firm have been reducing their debt equity ratio over the past few years. Although excessively high debt was incurred historically, the management have a good attitude to debt reduction. This should reduce the net interest payment required by the firm, improving the bottom line and shareholder returns. furthermore this will aid the firm’s credit rating further compounding the benefits. This shows both sensible management whilst also helping the bottom line for shareholders.

TMMG has an active acquisition policy, seeking to acquire agencies which expand the firm’s global reach, they have also been active domestically consolidating their market position. Acquisition expenditure hit £2.1m in 2014 from £0.1m in 2013. Acquisitions can be a risky business operation, in order to moderate the level of risk associated with activities such as these, TMMG has structured the transactions through the medium of means tested pricing, meaning that if the acquisition is less successful than previously anticipated, a lower price is paid. To the investor this aids to set-aside worries about the capital allocation within the firm.

The expansion of director shareholdership is pleasing. Providing an encouraging indicator of self belief and optimism, whilst also helping to subdue the principal-agent problem.

Bear View – Daniel

TMMG appears undervalued across a range of standard measures.  In this section I will look at the ‘bear’ views on TMMG and try to find out if the lower-than-average valuation ratios are justified.  The three main areas I will look at are the acquisition policy of the group, the firm’s level of debt, and the long-term returns they can expect to achieve.

Acquisitions play a major role in the company’s strategy.  This brings with it many risks for investors.  If TMMG are overpaying for these bolt-on agencies then shareholders are losing value.  Due to the large amounts of goodwill on TMMG’s balance sheet, the impact of impairment is heightened.  The company already has a history of this; during 2008 and 2009,  £18.5 million of goodwill was impaired.  This suggests a lack of financial discipline in making acquisitions, and perhaps that management are searching for growth without regard for price.  

According to recent filings, TMMG has £11 million worth of debt on its balance sheet.  This compares with a tangible book value of (-£6.8 million).  The latter figure, perhaps overcautiously, doesn’t take into account intangible assets of £77 million.  I believe this debt/tbv ratio could be an explanation for the relatively low p/e ratio.  This, coupled with the cyclical nature of marketing companies, means there does not exist a margin of safety. Therefore, for TMMG to be a successful investment, economic conditions would have to remain stable for the foreseeable future so that TMMG can continue to reduce the level of debt.

Marketing companies such as TMMG are very much people businesses.  This can be a substantial risk for long-term shareholders as the value of the company is less likely to be stored in intangible assets such as brand names and strong reputation, but instead come from irreplaceable employees and management.  If true, then these employees can demand higher remuneration at the expense of shareholder returns.  Not only this, but at some point in the future these employees may leave the company.  If they then take clients with them, this could lead to a loss of business for TMMG.  This, along with strong competition in the industry, leads me to believe that TMMG has no economic moat and hence in the long term will not be able to sustain excess returns on capital.  This however would not suggest TMMG is a poor investment.  If the stock price is low enough and TMMG continues to generate strong profits, large returns can be made in the future.


On balance BearandBull would recommend an investment in TMMG.  We believe that the continued growth of the company’s profit will eventually be reflected in the share price.  This isn’t to say that there are no risks involved;  The state of the balance sheet keeps our outlook cautious and is the main factor in our decision to give a low weighting of 5% to the stock in our portfolio.  In a bull market we would expect this to be a highly successful investment, and we will more than likely see outperformance above that of the wider market.  In a bear market however, the stock is exposed to greater risks than the average investment and thus we would expect a below average performance.  Time will tell how accurate our analysis has been, but in the short term we will look to take advantage of share price volatility by buying more shares, lowering our average cost basis.          

Disclaimer – This site is purely for an educational purpose and we do not advise using our analysis as any sort of financial guidance.

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