Connect Group (LSE:CNCT) has not had an attractive-looking balance sheet for many years. It had/has very high levels of intangible assets, especially goodwill, due to paying excessive prices for acquisitions. Even after including those doubtful “assets” in its balance sheet it could barely report a positive net current asset value. On top of that, it used to carry over £100m of bank debt – now down to between £50m and £90m depending on which day in the month you look at it.
Now that it has written-off large chunks of goodwill and other intangibles it shows a negative net asset value, NAV, of £74m. Excluding intangibles the net liability is £84m. Balance sheet data. £m August 2019 August 2018 August 2017 August 2016 Non-current intangible assets 10 51 107 165 Other non-current assets 22 44 51 62 Trade and other receivables 124 130 98 139 Other current assets 57 32 84 52 TOTAL ASSETS 213 257 340 418 Trade and other payables -174 -176 -136 -199 Other current liabilities -56 -64 -91 -83 Non-current liabilities -57 -63 -88 -123 NET ASSETS -74 -46 25 13How it survives its poor balance sheet The BS is heavily dependent on very large amounts of credit granted by its suppliers, mostly publishers - trade and other payables are £174m. Connect does not pay for newspapers and magazines until sometime after its customers have paid them. Newsagents pay via weekly direct debits but across the Group the average credit period taken by customers is 22 days but the average credit period taken by Connect from its suppliers is 31 days. A concern would arise if this positive cash cycle is interrupted, meaning that Connect would need to borrow more from banks. However, there is reassurance in the contract terms with publishers - they contain clauses granting long credit periods, and the contracts last for five years. Net bank debt While the company has brought down its debt levels by selling businesses and by applying some of its positive free cash flow to debt repayment, the indebtedness numbers are still very high. £m August 2019 August 2018 August 2017 Opening net debt -83.4 -82.1 -141.7 Free cash flow to equity +8.3 +20.2 +28.7 Pension deficit recovery -1.6 -4.7 -4.8 Dividend paid 0 -24.1 -23.6 Disposal proceeds 0 +12.9 +58.2 Cash flow from discontinued business 0 -8.8 -1.1 Finance lease creditor and other +2.8 +3.2 +2.2 Closing net debt -73.9 -83.4 -82.1 Net debt/EBITDA 1.9x 1.8x 1.2xSince yearend £15m has been raised via sale and leasebacks. Also another six months of stable trading to the end of February has probably reduced debt levels by around £6m. Covenants on bank loans:
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Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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