Snoozebox Holdings - Is a turnaround taking shape?

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Snoozebox Logo

It isn't all too common that a company's share price doubles within a day, but that is an achievement that Snoozebox (LSE:ZZZ) made last week, albeit from all-time lows. The company has an interesting product - it buys up and converts shipping containers into portable accommodation, complete with bed, washroom and electricals. Snoozebox then deploys these shipping containers, en masse, to various events such as the Silverstone Grand Prix, where accommodation shortages can pose a problem for travellers wanting to visit and stay overnight. Snoozebox therefore describes its product as a 'Portable Hotel'. Since listing in 2012, the share price has had mixed fortunes, initially rising strongly as investors bought into the concept, but after financial difficulties took hold, the share price has plummeted, hitting a low at 6.38p before finishing the week up at 11.88p. Does this mark a turnaround for Snoozebox, or is it a blip in a long-term downtrend? Snoozebox is currently valued at £12.92m.


The technical picture for Snoozebox is much improved after the recent spike. Investor interest has risen and this bodes well for the liquidity of the shares - they were previously quite illiquid, especially towards the lows when the spread was wide. The spread is now much narrower, which also helps investors. There are two scenarios from the current level taking a very short-term outlook. The first scenario is that there is a follow up spike towards 15p. However, that doesn't look the most likely scenario given the sell-off on Friday. The second scenario would see a further re-tracement back towards 10p, where it would probably find short-term support. I'd say this was the more likely scenario, but the first hour on Monday will outline where Snoozebox will move (in the very short-term). Given that the company doesn't have a stream of newsflow due, the gradual drop back is more probable (Scenario 1 30:70 Scenario 2).

What is not shown on the chart is that the shares met a stumbling block at between 7.75p and 8p, and that was almost certainly caused by an institutional overhang at this level. When the shares reached that level, there was a notable period of time over which the share price didn't move, despite buying at the full ask price. That is perhaps a concern given that it suggests an institution is willing to sell out at (what is all likelihood) is a loss. Equally though, they may have been slow to move and so that may have been limit selling at a pre-set level. To form a more bullish medium-term outlook, the share price needs to close above 14p which is the previous minor high. If the shares continue downward, support is at 10p and I'd imagine there would be increasingly strong support below that. The spike down on Friday was also not unexpected given the sharp rise - there would have been inevitable profit taking. The worry over a possible future placing also will have weighed on investors' minds.

It is important to remember though, that the largest rises for companies often come when good news is released and the share price is at the bottom of its cycle. One reason for that is because investors see that is has traded at a higher share price before, and come to the conclusion that is must be undervalued. That's not necessarily true. In fact, when the company IPO'd back in 2012, at 40p it had a market cap of £20.52m and £11m of that was in cash. However, when the company IPO'd it was at the start line with barely any revenues, so you can argue that a revenue stream has been created and that should be worth £Xm. The reality is that for it to be at that same market cap (ex cash = £9.52m), the share price would only have to be a fraction of 40p. That's worth bearing in mind.

Positively though, the company has had strong institutional support in the past. For example, Ignis Asset Management were impressed with the business model hence took a large stake at a much higher share price. As further placings have come to light, institutions such as Hargreave Hale (Marlborough funds) have taken stakes at higher prices, which is encouraging. It demonstrates confidence in the business if managed properly. Unfortunately for investors, the company has been managed poorly in the past and that has led to many losing a large proportion of their initial investment.

As shown in the graphic on the right, Snoozebox's product is essentially 9'6'' ISO steel shipping containers that they block together to form a portable hotel. These containers can fit on the back of trucks and are transported to various events where they are set up, and rooms sold to visitors of the event. The product itself seems innovative, and there is demonstrable demand for the extra accommodation. For the 2014 calendar year, a couple of the events  include the Formula 1 British grand prix in July, and lower key events such as the British Superbikes Championship. The price point of the rooms depend upon the event, with a 4 night, 2 persons package for the British grand prix starting at £1500, but from £75/night for the Superbikes Championship. It is estimated that in the UK alone the sleeping accommodation market is worth £11billion/year at around 10000 events.

There obvious competition for Snoozebox's accommodation comes from B&Bs, motor homes and  camping, although the only arranged accommodation competition is from the Bed and Breakfast firms. If these are located far away from the event it can be a problem thus there is a convenience factor that comes into play. The only requirement for Snoozebox rooms to be set up is for a sufficient, suitable amount of space, and these events usually have that nearby, if not on-site. Installation and removal of a 300 room unit can be achieved in just 3/4 days (on natural terrain), and there is no dismantling of each room unit involved.

The accommodation doesn't require power, water or waste drainage either. For every ~80 rooms there is a central mother unit that has a power generator and water tanks. For these 80 rooms, one fresh water tanker and one waste extraction tanker is required every day, so the logistics are probably quite complex. In addition, for events where the structure is required for more than 28 days, planning permission from the council needs to be sought. Rooms are typically fitted out as an en suite with a double bed, a single bed, air conditioning, Wifi, TV, and room safe. This fitting is done via a framework agreement with JR Pickstock.

There are two principal markets that Snoozebox targets; Events and Contrax. Events includes motor racing events and festivals whereas Contrax involves the provision of accommodation for longer-term military and civilian use. Snoozebox is planning to roll out first-generation room stock into semi-permanent hotels in London and Edinburgh during 2014. The clear benefit of this business model is that revenue streams are predictable.

The product therefore seems strong, and I think the brand also is. The issues experienced by the company to date revolve around the initial growth of the business, so I'll briefly go through the main points in chronological order.
- November 2012: Net proceeds of ~£7.8m raised at 55p in November 2012
- April 2013: Final results released. Revenue lower than anticipated at £3.8m (versus £5m expected). This was down to an accounting error, which meant that revenues not due to Snoozebox had been booked, although it was called an 'accounting technicality'. A loss of £4.4m was booked. The financial error led to Founder and CEO Robert Breare stepping down and FD Chris Upton also resigning
- May 2013: Further funding will be required to exploit the opportunity pipeline. Snoozebox withdraws from 2 events as returns are likely to be 'inadequate'. Later in May, Breare and Upton fully resign from directors of the company. Sadly, Breare passed away later in 2013
- May 2013: £9.5m in net funds raised at 24p through institutional investors
- September 2013: Interim results released for the period up to July. 11% increase in room stock to 578 rooms. H1 revenues soar to £4.3m, but so do losses to £5.1m. Cash of £9.9m and debt of £0.8m. Net asset value of £21m (although this will now be much lower). Negative gross margin as cost of sales exceed revenues. Admin expenses much higher at £3.14m. Net payables of ~£5m.


Thorpe Park's on-site Snoozebox hotel
http://www.thorpepark.com/on-site-hotel/
It is not difficult to see why the CEO and FD were pushed out of their job. The results for H1 2013 were appalling with increased losses, a negative gross margin, and rapidly increasing administrative expenses, combined with an accounting error, which led to a profit warning.

The management restructure stretched through November when COO Gary Thomson was made redundant during a cost-cutting exercise. It seems extremely peculiar given that he had only been in the job since April. Along with Thomson, there was a 60% reduction in the permanent headcount, which should slash administrative expenses, and should mean a more cost-efficient operation. It does make you wonder why there were so many excess jobs if 60% of the workforce can be cut whilst revenue grows.

The results of a business review initiated in early 2013 were released in December. Importantly, a positive gross margin had been achieved, which is a starting point; although still way off meaning that Snoozebox is profitable. Nonetheless, the company was experiencing 'high levels of sales enquiries, encouraging levels of repeat business, and positive guest experience feedback'. Revenues for 2013 were announced to be £6.5m, which does actually suggest a strong H1 weighting. Given that H1 revenues were £4.3m, only £2.2m of revenues were achieved in H2, which may be down to seasonality, the business restructuring or more seriously, a drop off in sales. The latter point seems less likely given the strong outlook that was pointed out. However, investors were disappointed because Snoozebox announced, "In order to maintain leadership of this market, the company will require investment on a scale that warrants future funding".

So I was a little surprised when the valuation of Snoozebox shot up as much as it did last week during a routine trading update. Full-year revenues were confirmed to be £6.5m and cash of £4.5m. Positively though, sales for 2014 were substantially ahead of expectations with some sale prices around double that charged last year. Perhaps it was that the market cap of Snoozebox was only around £6.5m, so the confirmation of a large cash balance was enough to re-spark investor interest. New 2014 events for the Ryder Cup and Glastonbury were announced, and the CFO, Lorcan O Murchu, was appointed as the CEO. The increased prices and cost efficiencies also led to margin improvement. A next generation hotel design was commented upon - this should reduce costs significantly, increase the number of available rooms substantially, and a subsequent rise in revenue per room.

So is Snoozebox finally turning around? I'd be sceptical at the current point in time. First off, I'd want to see what the trade payables figure currently stands at. The company burned through £4.6m in cash since June, and I would guess the net trade payables figure still stands at least at a couple of million pounds. On the contrary, the gross margin achievement and reduction in overheads should mean that operational cash burn is reduced. The problem with operational cash burn has only been half of the problem. The real problem with cash is the cost of scaling up the business.

 Figures given by the company suggest that the cost to buy and fit-out each container is approximately £31,000, so it is not a particularly cheap operation and there is a significant amount of upfront expenditure required. There is no doubt that Snoozebox will need to substantially increase its future room stock if it is to capitalise upon its first mover advantage in the UK, and that poses a problem for investors. If they were to add another 200 rooms, that would cost £6.2m (using £31,000 as the reference figure). With operational cash burn, it is difficult to see where that cash will come from so there it is almost a certainty that further large placings will be required in the future. With the market cap only at around £13m, that means there will probably be large-scale dilution. I don't see debt being an option - as it stands, the business model is unproven and cash is being consumed, so any loan notes would carry a high coupon and that could be detrimental in the long run.

Snoozebox's near term focus is on the UK and Europe, although I consider this to be another obstacle. In the admissions document, the company noted that it had applied for patents to cover 'Temporary Accommodation using Shipping Containers'. Government documents show that the initial patent application was withdrawn before grant, and no update on that has been made to investors. Another site has a patent application for Europe dated for 2013 and shows the application to be in stage A1, which from what I understand means that it has not been granted. Investors in Snoozebox should try to find out whether or not there actually is a patent granted in the UK or in Europe. Their UK operations will benefit from first-mover advantage, but if it is not patented in Europe, there is no intellectual property and in theory barriers to entry are low so the business model is easily replicable. Snoozebox has said that they may seek out foreign partners for the business, which makes sense, but in the long run, if this does turn out to be successful it will be copied by other overseas firms, so having a patent would be important if Snoozebox plan to meet their ambitions. The patents applied for are also under Robert Breare, so I'm not sure how that would work now that he has passed away, and given his dismissal from the company. The use of containers as accommodation is not a new idea either (which causes concern). Brighton has various examples of then being turned into semi-permanent housing and there are companies in Europe such as Sleeping Around, which provide accommodation in containers. If there are no patents, I'm sure other firms could produce similar quality containers at a lower cost, so Snoozebox really does need to capitalise on its first mover advantage.

Those are two concerns that make Snoozebox an extremely high risk investment proposition at the current point in time, in my view. If they do have patents granted (they need to cover Europe ideally), then the remaining risk is with funding and the dilution that this will entail. Of course, once Snoozebox have sufficient rooms to cater for a medium-sized operation, they can focus upon profitability, but in the long-term they need to secure their market position and that really does mean more rooms, and more rooms means more cash required. Perhaps a partnership to develop the concept would alleviate those pressures. Whilst the shares could continue upwards in the medium-term and the business concept is strong, I'm not yet bowled over by the long-term investment proposition, and profitability will be a major hurdle. Increasing their room stock and rolling out the next generation rooms will be the first step. It's too early to say whether a turnaround really is taking shape. No Rating.

8 comments:

  1. Great reserach el1te. I will try to find out about the patent and get back to you

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    1. I second that. I have not been able to find a patent that has been granted which is a concern

      CraigJ

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  2. Very balanced and well researched.The 31k figure seems very high...

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    1. Yes, it does seem high and that is a weakness if there isn't a patent granted. The figure is derived from documents associated with the last equity placing, but there has also been another figure before that. Below is the snipper from the equity placing document:

      - "it has invested £17.9 million in 578 Snoozebox rooms to date;"

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  3. mandaroza30 October 2014 09:03
    Having slept in one for three nights, I can confirm the reason they are losing money is they make a terrible sleeping environment. No fresh air. Only air comes through air con system. Noise of air con "mother unit" keeps you awake, air con in cabin is noisy, and sleeping with no air con induces headaches. Great!

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  4. £31k for fit out seems a little on the high side? Does this include a contribution per room to the "mother unit" I am sure that this cost can be brought down with an efficient fit out operation...

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    1. I believe that Snoozebox have introduced a new generation of room, that will likely have a lower 'complete' setup price, although that is not something I have since looked into

      Best,
      El1te

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