Update: Victoria PLC (VCP.LSE)
Interim Accounts to 1st October, 2022
Note
All figures are in £UK unless otherwise stated.
Data
Recasting of the HY23 accounts appears in the data file below:
Date
21th December, 2020
Current Share Price
£4.61
Industry
Carpet & Flooring
Trading History
Source: London Stock Exchange
Overview
Victoria PLC (VCP) is one of Europe's largest flooring companies and trades on the Alternative Investment Market (AIM) which is a specialised unit of the London Stock Exchange (LSE).
AIM is generally for smaller and more riskly companies and there are more relaxed regulations and listing requirements.
VCP with annual turnover of circa £1.5bn seems large for an AIM listed company.
It has grown, in particular by an aggressive number of acquisitions over the last decade.
This article covers the interim financial statements to 1st October, 2022. This balance date varies slightly from that of the previous half year period of 2nd October, 2021.
The interim statements for the 26 weeks ended 1st October, 2022 were recently released. The article covering the annual results for the 53 weeks ending 3rd April, 2022 can be found here.
Gross Margin
The gross margin has declined significantly in HY23 compared to the pcp. From a previous gross margin of 34.5% the company now records a gross margin of 28.6% which is a worrying decline.
EBIT increased by only 4.6% despite the massive 58.7% increase in revenue.
Negative Goodwill
Negative goodwill has arisen on two of the company’s interim period acquisitions. It arises when a company acquires another and the net assets are greater than the purchase price. However, it’s important to note the the assets and liabilities are measured at fair value.
This begs the question how are these values arrived at aand therefore how is the negative goodwill calculated?
IFRS 3 allows the negative goodwill to be taken to the revenue statement. And this is what has happened.
£70.4m of negative goodwill arose from the Balta aquisition and £2.8m of negative goodwill arose on the Ragolle Rugs acquisition. £61.5m ended up on the revenue statement.
This is a figure greater than the total earnings for the company.
Unfortunately, there is no detail in the notes to the accounts on how the fair value of assets and liabilities amounts were determined and by whom. Hopefully this can be assessed when the annual report 2023 comes out.
Hyperinflation Accounting
Hyperinflation accounting is complex and £32.1m of hyperinflation adjustments have been included in the condensed consolidated statement of comprehensive income.
It is hard to determine the veracity of this amount given that the figures involved have not been supplied.
However, the amount is material and it impacts the equity ratio positively creating over a 1% improvement in that very low ratio.
There was a £16.6m gain in the retranslation of overseas subsidiaries which also appeared in the condensed consolidated statement of comprehensive income.
These two items boosted the equity ratio significantly.
Operating Cash Flow
The operating cash flow is strongly negative despite what the company states. In fact, they created a new type of operating cash flow in their chairman’s statement; operating cash flow before interest. tax and exceptional items of £22.1m.
Actually, the operating cash flow in HY23 was -£20.5m using this method of calculation which includes the principal amounts of lease liabilities.
Even with principal payments of lease liabilities removed the company produced a negative operating cash flow of £9.0m.
Cash Balance
What with acquisitions, purchases of fixed assets, repayments of interest bearing debt and negative operating cash flow the company burned through a sizable chunk of its cash.
At period end the cash balance with overdraft deducted was £73.5m which was much lower than the balance a year earlier of £258.0m.
The company does however have sizeable undrawn banking facilities available to it.
Funding Costs
The condensed consolidated income statement records finance costs of £28.9m in HY23. The funding costs amount was reduced by some unrealised foreign currency credits and it is fair to include them in the calculation.
Funding cost cover declined HYoHY from 2.4 to 2.1 times.
The company is fond of using underlying figures. It states in the notes to the accounts that underlying finance costs are £21.3m and places preferred equity finance costs in non-underlying items. This is not correct and these costs should be included in underlying finance costs.
This brings the underlying finance costs to £35.5m which is much more than the stated underlying finance cost figure. This brings funding cost cover on the underlying figure to less than 2.0.
Debt
Debt has increased substantially over the pcp with net debt standing at £1,077.4m including lease liabilities (which the company does not include in its net debt calculations).
The net debt at the end of the pcp was £702.4m.
Equity Ratio
The equity ratio has increased from 14.2% at the end of the pcp to 14.5% at the end of HY23. However, there are concerns about the large increase in shareholders’ funds on the back of the use of hyperinflation accounting and the retranslation of overseas reserves.
Net tangible assets stand at -£299.2m while shareholders’ funds are £294.7m.
Segments
Ideally the segmental information should include the EBITs and total assets in each segment. The company has provided operating profit and net assets information with a large chunk of its liabilities settling on the ‘central’ part of its business, presumably corporate.
This artificially inflates the operating returns on net assets figures for the operating units of the company.
But given those figures it can be seen that the returns on UK & Europe Ceramic Tiles were poor when compared to UK & Europe Soft Flooring and Australia.
Taxation
There was some tax paid on foreign operations but none was paid on UK operations. This is a flag for considering what real profits were actually made by the group at least in the UK.
Dividend
There was no dividend declared in the current period and there was none declared in the prior interim period.
Summary
The company is operating on a paper thin equity ratio which is supported on accounting treatments outside of core operations including currency traslations, hyperinflation accounting and negative goodwill generation.
Despite these treatments the company still has massive negative net tangible assets.
The group is losing money, accounting treatments aside, and is struggling to maintain EBIT despite large increases in revenue.
The negative goodwill on aquisition is a tool to support the revenue statement but in the future this means that the company must continue to generate acquisitions that have negative goodwill attached or find great synergies in the acquirees.
Another red flag is the negative recast operating cash flow. It is unable to generate postive cash flow from its core operating activities.
Company debt has increased dramatically as have the underlying servicing costs on debt and quasi-debt (preferred equity).
The company’s share price has fallen over the last 12 months and it appears there are emerging good financial reasons why.