James Faulkner on Stanley Gibbons: Stamp Collector to Take on eBay

Stanley Gibbons (SGI) is probably one of the best-known companies you haven’t heard of – unless you’re into philately. The firm is old – 150 years old – but it has embraced the internet and is cementing its position as the leading collectibles specialist. Yes, that’s collectibles rather than just philately, because Gibbons has recently made some acquisitions which have expanded its scope of expertise into new areas rather than just stamp collecting.

Last September, Gibbons acquired coin dealer Noble Investments for £45.7 million. Noble’s business is the trading and auctioning of collectibles, including ancient, English and world coins, commemorative medals and tokens, banknotes and paper ephemera, military orders and decorations, autographs and world stamps, fine arts, antiques and jewellery. It also deals in and auctions rare and valuable books, manuscripts and contemporary works on paper.

The logic for this acquisition was pretty straight-forward: the business combination brings increased expertise in the collectables market, increased auction experience, a wider international presence for the Noble business, cross selling opportunities and opportunities to reduce stock positions. Cost reductions were another major factor, as Noble’s AIM admission costs were removed, central costs merged, and property rationalised.

Next up, this September saw the acquisition of Mallett Plc, one of the oldest established antique dealers in the world, for £8.6 million. Founded in 1865 in Bath, Mallett specialises in the finest pieces of furniture and works of art, including pictures, clocks and other high quality objets d’art, primarily from the 18th century and Regency periods. For over 100 years Mallett has been sourcing important antiques for private collectors and the great museums of the world. The firm operates out of both London and New York, and comes replete with a 60% interest in H J Hatfield & Sons Limited, one of the longest established and highly respected restoration businesses in the world.

In particular, the acquisition of Mallett expands Gibbons’ expertise in an adjacent collectibles area and furthers its ambition to become a global auction house for collectibles. Management has already identified opportunities for cross-selling amongst both companies’ client bases, as well as the potential to build a stronger auction platform by combining the brands. As with Noble, there is also an opportunity for further rationalisation of the group’s wider property portfolio through utlising Mallett’s London and New York locations.

Numbers…

Recent interims suggest that this consolidation is paying off. Turnover was £27.1 million, up 58% on the prior period, boosted by acquisitions. Although like-for-like turnover, excluding acquisitions, was £17.2 million and roughly flat on the prior period, trading profits (before internet development costs, amortisation of Noble intangibles, share option charges, IAS 19 pension costs and exceptional costs) were £6.1 million, up from £1.9 million in the equivalent period in 2013. Profit before tax rose from £0.5 million to £3.7 million, while adjusted earnings per share (excluding amortisation of Noble intangibles, share option charges, IAS 19 pension costs and exceptional costs) were 10.02p, up 162%. The firm also maintains a conservative balance sheet. Net debt at 30th September 2014 was £3.3 million, although this was down from a small cash position in 2013, primarily due to the group’s investment in a number of exceptional opportunities to acquire high value collections during the period, resulting in an increased level of inventories. An 8% increase in the interim dividend to 3.25p was recommended.

Online growth…

Gibbons is also working hard to make better use of online, with the “soft launch” delivered this month of its online collectibles marketplace, which can be viewed at marketplace.stanleygibbons.com. With a “hard launch” to follow in Q1 2015, this is a potentially transformational development that will leverage the Stanley Gibbons brand to create an online marketplace for lower value coins and stamps. The Stanley Gibbons brand name, credibility and business relationships with trading partners give it a material advantage over less specialised competitors. Furthermore, the marketplace will continue to develop from the launch site, with significantly more product to be added, along with online access to the wealth of information Stanley Gibbons currently provides in hard copy. With time, this platform could bring a step change in scale and profitability.

What’s it worth?

Gibbons remains on track to meet expectations for the full year, albeit with an element of uncertainty regarding the second-half weighting. Broker Peel Hunt sees adjusted pre-tax profits of £11.2 million on revenues of £64.9 million for the year to March 2015, driving EPS of 20.3p. This implies a current rating of 14.3x, falling to 11.8x for FY16, which looks attractive given the strong franchise, favourable structural backdrop and opportunities for growth. The current financial year should be significant for the enlarged business as investment in the internet operations made by Stanley Gibbons should start to deliver meaningful returns and the Noble and Malletts acquisitions should start contributing significantly to earnings.

The long-term investment case looks sound, driven by the rising global demand for collectables, both from collectors and as an alternative investment, along with the fact that despite being one of the largest players in the overall collectables market Stanley Gibbons continues to only have a small overall share, even after the Noble deal.