A fine development

Studio Retail Group 19 December 2019 Update
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Studio Retail Group

A fine development

Interim results

Retail

19 December 2019

Price

236.5p

Market cap

£204m

Net debt (£m) pre IFRS 16

241

Shares in issue

86.4m

Free float

61%

Code

STU

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

23.5

12.6

29.2

Rel (local)

19.1

8.3

13.1

52-week high/low

260p

154p

Business description

Studio Retail Group is a multi-channel retailer operating across the business-to-consumer and business-to-business market places. It is a market-leading value retailer and educational resource supplier in the UK.

Next events

Q320 trading statement

January 2020

Q420 trading statement

May 2020

Preliminary results

June 2020

Analysts

Russell Pointon

+44 (0)20 3077 5757

Neil Shah

+44 (0)20 3077 5700

Studio Retail Group is a research client of Edison Investment Research Limited

Studio’s interim results and current trading statement indicate improving momentum and profitability across the majority of the businesses, highlighting that the shift to digital is improving the growth outlook. The planned disposal of the Education business should lead to higher growth rates for revenue and higher profitability for the remaining business. We upgrade our FY20 PBT estimate by 2% to take account of the improved gross margin performance, which leads to our DCF-based valuation increasing to 450p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

479.6

26.8

25.9

0.0

9.1

N/A

03/19

506.8

28.8

26.5

0.0

8.9

N/A

03/20e

534.5

30.7

29.6

0.0

8.0

N/A

03/21e

556.5

31.8

30.6

0.0

7.7

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Studio benefiting from the shift to digital

The first six months of the financial year are somewhat seasonally less important (H119 was c 43% of FY19 revenue) for the Studio (Product and Financial Services) division. In total, the division’s revenue was broadly flat at +0.3%, gross profit improved by 6% and adjusted operating profit increases by 1.1%. The company does not chase sales ahead of the peak trading period in Q3, in which, to date, it has traded strongly, with 10% Product revenue growth, underpinning our broadly unchanged assumption of 7% revenue growth for FY20. The company has highlighted record numbers of customers, single-day online sessions and daily dispatches, implying strong customer acceptance for the move to digital.

Planned disposal of Education

The planned disposal of Education to a competitor, YPO, for gross consideration of £50m (10.3x adjusted EBITDA in FY19), represents the final disposal in the transition to being a digital-first, value-focused retailer. Completion is expected in 2020 and the transaction is subject to clearance by the Competition and Markets Authority. Net proceeds are likely to be £35m, some of which may be invested in warehousing infrastructure. The transformation over the last two years, with changes to products, solutions, pricing and controlling of costs, is feeding through to improved profitability for Education: H120 revenue -1.4% and adjusted operating profit +64%, derived from greater volume of own brand and online sales at higher margin.

Valuation: Well supported by DCF valuation of 450p

Our revenue forecasts are relatively unchanged, but our PBT estimate for FY20 has increased by 2% to reflect the improved gross margin performance in H120. Our DCF-based valuation increases to 450p from 423p, representing a premium of 90% to the current share price.

Exhibit 1: Financial summary

£'000s

2018

2019

2020e

2021e

31 March year end

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

Revenue

 

 

479,613

506,807

534,490

556,540

Cost of Sales

(281,706)

(298,000)

(308,787)

(319,185)

Gross Profit

197,907

208,807

225,703

237,355

EBITDA

 

 

46,594

50,948

54,789

55,929

Operating Profit (before amort. and except.)

 

 

38,171

41,510

43,496

45,791

Intangible Amortisation

(1,996)

(2,167)

(1,095)

(2,111)

Operating profit pre excl post-intang amortisation

36,175

39,343

42,401

43,681

Exceptionals

0

(4,158)

0

0

Other/share based payments

(199)

(926)

(1,000)

(1,000)

Operating Profit

35,976

34,259

41,401

42,681

Net Interest

(9,130)

(9,656)

(10,707)

(10,920)

Derivatives, other

(4,701)

4,750

0

0

Profit Before Tax (norm)

 

 

26,846

28,761

30,694

31,761

Profit Before Tax (FRS 3)

 

 

22,145

29,353

30,694

31,761

Tax

2,081

741

(6,139)

(6,352)

Profit After Tax (norm)

22,399

22,882

25,556

26,409

Profit After Tax (FRS 3)

24,226

30,094

24,556

25,409

Average Number of Shares Outstanding (m)

86.3

86.3

86.3

86.3

EPS - normalised (p)

 

 

25.9

26.5

29.6

30.6

EPS - normalised and fully diluted (p)

 

 

25.9

26.5

29.6

30.6

EPS - (IFRS) (p)

 

 

28.1

34.9

28.4

29.4

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

41.3

41.2

42.2

42.6

EBITDA Margin (%)

9.7

10.1

10.3

10.0

Operating Margin (before GW and except.) (%)

8.0

8.2

8.1

8.2

BALANCE SHEET

Fixed Assets

 

 

81,675

81,025

88,489

89,241

Intangible Assets

25,175

24,952

23,734

22,624

Tangible Assets

47,596

45,517

55,394

57,257

Investments

8,904

10,556

9,360

9,360

Current Assets

 

 

311,878

322,887

341,738

362,636

Stocks

54,375

48,757

60,722

62,700

Debtors

230,802

235,923

252,494

264,441

Cash

26,244

37,603

27,997

34,970

Other

457

604

525

525

Current Liabilities

 

 

(81,190)

(76,415)

(83,729)

(86,970)

Creditors

(80,618)

(75,917)

(83,211)

(86,452)

Short term borrowings

(572)

(498)

(518)

(518)

Long Term Liabilities

 

 

(273,170)

(282,215)

(273,812)

(270,812)

Long term borrowings

(258,001)

(270,545)

(264,192)

(264,192)

Other long term liabilities

(15,169)

(11,670)

(9,620)

(6,620)

Net Assets

 

 

39,193

45,282

72,686

94,094

CASH FLOW

Operating Cash Flow

 

 

11,439

22,356

19,194

37,245

Net Interest

(8,365)

(10,017)

(10,842)

(10,920)

Tax

581

(1,931)

(6,592)

(6,352)

Capex

(10,595)

(11,545)

(14,260)

(13,000)

Acquisitions/disposals

(450)

0

0

0

Financing

0

0

0

0

Dividends

0

0

0

0

Net Cash Flow

(7,390)

(1,137)

(12,500)

6,973

Opening net debt/(cash)

 

 

224,974

227,889

216,556

236,713

HP finance leases initiated

(545)

(571)

(2,458)

0

Other

5,020

13,041

(5,199)

(0)

Closing net debt/(cash)

 

 

227,889

216,556

236,713

229,740

Source: Company data, Edison Investment Research. Note: Financials are not adjusted for IFRS 16.


General disclaimer and copyright

This report has been commissioned by Studio Retail Group and prepared and issued by Edison, in consideration of a fee payable by Studio Retail Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Studio Retail Group and prepared and issued by Edison, in consideration of a fee payable by Studio Retail Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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