Caffyns (LSE:CFYN) has been a family-dominated firm for over 150 years, despite it now being a Premium Listed company on the LSE. The family have been accused by a bulletin board writer of running a corporate board of directors which “is grossly self-indulgent”.
I need to start the process of assessing whether this is true to the point of being seriously detrimental to minority shareholder interests, a group to which I now belong.
The family do not control through ownership of more than 50% of the ordinary shares, of which there are 2.695m in issue. They control the firm through their holding of all the 2m 6% Cumulative Second Preference Shares, which each have the same voting rights as the ordinary shares (one vote per share), except in a few special situations related to the Premium Listing provisions, such as voting to leave the LSE (the prefs lose the right to vote).
In addition, Caffyn family members not sitting on the board own around 16% of the ordinary shares. Sarah Caffyn, who is a board member, has 46,232 (1.7%) ordinaries and Simon Caffyn, CEO, has 76,988 (2.9%). Also, the Caffyns’ Pension Fund holds 4.66% of the ordinaries.
(There are some other preference shares held by the family but they do not carry votes and are not relevant to the power dynamics of the firm).
Evidence for the self-indulgence charge
We’ll start with the money paid to shareholders, staff and directors over several years.
£mDividends + cost of buying the company’s shares Staff pay (including directors) Issue of shares for SAYE Directors’ emoluments
20210 13.6 0.003 0.59
20200.61 13.7 0 0.66
20190.61 13.7 0 0.74
20180.61 13.1 0 0.63
20170.61 + 0.9 15.0 0.3 0.81
20160.60 + 0 15.7 0 0.88
20150.56 + 0 14.8 0.005 0.86
20140.36   + 0.39 14.5 0.3 1.153
20130.33 + 0 14.2 0 0.91
20120.34   +  0.1 15.0 0 0.83Clearly, the directors have taken more cash than the shareholders have received, and £590,000 in director’s pay seems a lot for a £12.5m company. But, I suppose, at least director remuneration has fallen from the heights of 2014.
The question we need to ask is whether……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

I’ll use Piotroski’s nine variables to get an overview of financial distress risk at March 2021.

1. Is the company profitable?

In the year to March 2021 Caffyns made £1.4m profit after tax, therefore it gains a Piotroski point.
2. Does the company produce positive cash flow from operations?
Caffyns generated £4.6m of operating cash flows before movements in working capital, thus a Piotroski point is gained.
3. Has return on assets improved?
A profit in 2021 following a loss in 2020 means an improvement. Third Piotroski point.
4. Is cash flow greater than profits?
Yes. Fourth point scored.
5.  Has the ratio of long-term debt to average total assets during the year diminished?
For 2020: £11.8m/£94.7m = 12.46%
For 2021: £12.2m/£95.5m = 12.77%.
No Piotroski point.
6.  Has the current ratio improved?
Current
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Superficially, there is an impressive gap between the company’s market capitalisation, £12.5m, and property assets of £54.7m. But before getting carried away we need to consider whether the company is vulnerable to failure because of its debt levels and covenants on those loans.
Net bank borrowings fell between 31st March 2020 and 31st March 2021 from £16.1m to £10.3m, so that is encouraging. The makeup is £5.7m of cash and £16m of borrowing.
Debt facilities have been agreed with HSBC and VW Bank:

• HSBC term loan with an outstanding balance of £6.6m in March 2021. Repayable in instalments to 2038. Renewable in March 2023. An indication of Caffyn’s good standing with HSBC: In the preliminary results for the year to March 31st 2021 the directors stated, “In order to assist in the conservation of cash balances, HSBC granted capital repayment holidays on our term loans, for the March and June 2020 quarters, each being a repayment of £94,000.”
• HSBC revolving credit facility of £7.5m, renewable in March 2023. Balance in March 2021 about £5m.
• HSBC overdraft facility of £6m, renewable annually.  Preliminary Results: “The Company enjoys a supportive relationship with HSBC and, following the outbreak of the covid-19 pandemic in March 2020, the Company temporarily increased its overdraft facility limit from £3.5m to £6.0m. In September 2020, the Company reduced its overdraft facility back down to £3.5m.” At 31st March 2021 the total of overdrafts owing was £3m, but some of this might be to VW (see below).
• VW Bank overdraft facility of £7m renewable annually. The VW overdraft is asset-backed lending with cars being used a security.
• VW Bank term loan, now £1.5m, repayable November 2023. Preliminary Results to 31st March: “In order to assist in the conservation of cash balances, [VW] granted capital repayment holidays on our term…for the months of April, May and June 2020, each being a repayment of £42,000”.

There is plenty of headroom in financing, as demonstrated in the preliminary results to 31st March 2021: “Available but undrawn facilities with HSBC and Volkswagen Bank at 31 March 2021 were some £16m (2020: £10m)”.
Debt outstanding at March yearends 2021 - 2018
£m 2021 2020 2019 2018
Current 3.9 8.9 4.9 1.4
Non-current 12.2 8.7 12.6 13.1
Total debt 16.1 17.6 17.5 14.5
Less cash -5.7 -1.5 -3.9 -2.2
Net debt 10.3 16.1 13.6 12.3Preliminary results to 31st March 2021: “This substantial reduction [in bank debt over the year] reflected the strengthened controls over working capital and cost savings implemented during the year, as well as the significant covid-19 support received by the Company from the Coronavirus Job Retention Scheme and the business rates holiday.”
Covenants
The VW term loan and the HSBC debt, are subject to covenants tested with respect to:

•  interest cover ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 

I first bought into Caffyns, the car dealer (LSE:CFYN), in 2017 for my Modified price earnings ratio portfolio. But I sold it last summer at the height of the first Covid-19 wave as part of a defensive strategy in fear of a long and deep recession, which would not be good for either car sales or land values.
Of course, we all know now that, thanks to vaccines and economic stimulus, far from a recession the economy is set to boom. This means that a company with property assets worth four times market capitalisation is worth another look. These acres of market towns in south-east England are currently being used to house thousands of vehicles in 13 showrooms and display sites. But as house prices rise and space for warehousing becomes scarce these sites have valuable alternative uses.
As well as the valuable land (valued at £55m in March) the company’s profits have moved ahead during the Covid-19 crisis as the demand for second-hand cars boomed and servicing provided a steady flow while the firm was in receipt of government money.  With recovery we should see an increase in new car sales once supply issues are resolved.
Furthermore my previous concern about onerous debt clauses has lessened considerably because the company reduced its debt significantly in the last year: HSBC could, in theory,  take a showroom or two in the event of default, but the chances of this happening are reduced because (a) net debt has fallen from over £16m to £10.3m and (b) profits keep flowing further bolstering the balance sheet and cash flow.
I bought at market capitalisation of 2.695m shares x £4.65 = £12.53m.
Previous newsletters about Caffyns: 10th – 16th Aug 2017, 14th – 16th Dec 2017, 27th – 31st July 2018, 5th – 10th Aug 2019, 23rd – 24th July 2020.
Net current asset value
£m March 2021 March 2020
Inventories 36.6 41.5
Receivables 5.1 4.3
Cash 5.7 1.5
CURRENT ASSETS 47.4 47.5
Less Liabilities (ignoring lease liabilities, including pension deficit) -65.9 -68.0
Less one-third inventories -12.2 -13.7
Less one-fifth receivables -1.0 -0.9
Very conservative NCAV -31.7 -35.1
Investment properties 7.8 8.1
Freehold property 34.6 35.2
Property revaluation surplus 12.3 11.8
NCAV + property………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1