Studio Retail Group |
A fine development |
Interim results |
Retail |
19 December 2019 |
Share price performance
Business description
Next events
Analysts
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* |
EPS* |
DPS |
P/E |
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.
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