UK Edition
Questor: there’s welcome progress with Majestic’s reincarnation but many risks remain. Hold
Questor share tip: the wine firm wants to sell its shops and go online-only. It’s talking to buyers, but we don’t know if a deal will be agreed – or at what price
“Transformational” is the word that company bosses often – too often, perhaps – apply to a takeover they have just negotiated. But it was certainly appropriate, in hindsight, for the purchase of Naked Wines by Majestic in 2015.
It turned out that Naked was really taking over Majestic: after four years as a combined business, the latter is to be sold and all the company’s efforts devoted to Naked, the online arm.
In many ways this makes complete sense. Wine retailing, like any other kind, is moving online and Naked has a subscription model that aims to produce regular income from customers whose loyalty it fosters. Costs are lower, data can be used to good effect and it’s quicker to expand internationally if you don’t need physical shops.
Naturally, there are also risks. The theory is great, but much depends on the skill with which the new plan is executed.
The other great unknown is whether, when and for how much the bricks-and-mortar Majestic business will be sold. When the group reported annual results earlier this month it said talks were at “an advanced stage with multiple bidders”. But it added that if nothing came to fruition over the summer it would retain the retail chain for the crucial Christmas period and reopen the sales process next year.
In view of that degree of uncertainty it is hardly surprising that the shares are a third below where we tipped them in March last year, although they have recovered from the sharp falls that followed the announcement of the new strategy in March this year.
At the time of last year’s tip we envisaged a relatively predictable future for the combined business. That predictability has now greatly diminished and investors face the prospect of several widely different outcomes: at one extreme a lucrative sale of Majestic and successful reinvestment of the proceeds into a Naked that grows according to the group’s ambitious plans; at the other a lengthy, distracting or unsuccessful sale process for Majestic and a failure to deliver on Naked’s potential.
Retaining a stake in the stock is therefore now more akin to a punt and, with apologies to investors who followed our earlier tip in the expectation of something more secure, that is how we will regard it as we retain our hold recommendation.
- Read Questor’s rules of investment before you follow our tips
We take heart from the energy and commitment of the chief executive, Rowan Gormley, who built Naked as an independent business and took on the combined group when it was bought by Majestic. Reassuring too is his personal holding of 6.1pc of the shares, worth about £11.4m.
Thomas Moore of Aberdeen Standard Investments, whose holding in Majestic prompted last year’s tip, said: “The fact that advanced talks are taking place with multiple bidders is encouraging. A successful sale would create an entirely different investment proposition – a much cleaner business with clearer growth prospects.
"The weak share price reflects the market’s anxieties over the price that any bidder will pay for Majestic’s stores. But for those patient enough to hold on, the prize is a well capitalised, high-return online growth business with a proven track record.”
While recognising the risks and the range of possible outcomes, we will hold on.
Questor says: hold
Ticker: WINE
Share price at close: 258p
Update: Staffline
Events at the recruitment and training firm have taken a disturbing turn.
It said last week that the costs of earlier failures to comply with minimum wage rules would be much higher, that exceptional charges for 2018 would total £32.6m, more than its current market value, and that as a result of this and weak trading announced earlier it risked breaching its borrowing contracts. It aims to get out of this jam by raising more money from shareholders.
The shares stand about 90pc below where we tipped them in February 2017. This is the market’s way to signal doubts over the firm’s survival. Investors who believe in its prospects will have to take part in the fundraising – private savers should be able to do so – if they want to avoid heavy dilution.
Shareholders face a stark choice. Those who cannot afford further losses should sell now. If the fundraising is successful, which depends on what the institutional investors do, the shares could rally strongly, but it’s a brave bet to make.
Questor says: sell/hold
Ticker: STAF
Share price at close: 127p
For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.