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N Brown - Financial distress risk

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N Brown (LSE:BWNG) carries over £500m of bank debt.  For a company with a market capitalisation of around £400m that seems a lot.  It makes sense to investigate the risk of financial distress.

Balance sheet

The balance sheet gives the game away on the two-businesses-in-one nature of N Brown.  In round terms, what we see is, at any one time, goods suppliers granting trade credit to the tune of around £90m.  This fills up the warehouses, which stock about £100m of stuff.

The other business, Financial Services, is represented by two key numbers:

  • Receivables, mostly debtor customers owing it money. Total receivables rose from £575m in March 2017 to £621m in March 2019.  The net customer loan balance, after taking account of likely defaults, is £585m, and other receivables is £36m.
  • Bank loans and overdrafts, which fund most of those receivables, amounting to £355m in 2017 and £511m in 2019

Due to the kitchen-sink accounting approach of the newly-appointed directors to throw in as many old liabilities as possible as “exceptional items”, and with most of these being cash payments, e.g. to HMRC and PPI victims, net current asset value has shrunk from £253m in 2017 to £65m.

This is concerning, but to the extent that the bad news has now been accounted for and we can look forward to a rebuilding of the balance sheet it is not terrible.  The reduced dividend means that only £20m goes in dividends each year for a company with a proven £55m after-tax income (assuming few exceptional item write-offs from this point forward).  Thus, perhaps the balance sheet can strengthen by £35m or so each year. In additional to what is shown in the table the company has £42.5m of land and buildings.

Key data from the balance sheet

£m,   March   2019   2018   2017
Inventories 100 111 106
Receivables 621 653 575
Derivatives 3
Cash 44 58 64
Current assets 765 822 748
 
Liabilities
Payables -141 -132 -99
Provisions -25 -44 -20
Tax and other -9 -9 -13
Bank loans and overdraft -512 -405 -355
Deferred tax -15 -12   -8
Total Liabilities 700 607 495
Net current asset value 65 215 253

There are some dangers:

  1. Banks may withdraw lending. This risk has been reduced with the new banking arrangements with medium-term commitments. There is a £500m facility secured against the………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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