An online retailer in waiting

Findel 18 July 2017 Outlook
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Findel

An online retailer in waiting

Final results

Retail

18 July 2017

Price

180.6p

Market cap

£156m

Net core bank debt (£m) at 31 March 2017

81

Shares in issue

86.4m

Free float

100%

Code

FDL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.3)

(9.9)

3.2

Rel (local)

(9.5)

(10.7)

(8.1)

52-week high/low

215.8p

155.0p

Business description

Findel comprises market-leading businesses in the UK online value retailing and education supplies markets. Findel’s objective is to develop sustainable growth in a marketplace for value-conscious customers who are rapidly moving their purchases online.

Next events

AGM statement

August 2017

Interim results

November 2017

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

Findel is a research client of Edison Investment Research Limited

The jump in online sales mix from around 56% a year ago to 63% in FY17 is significant in showing Express Gifts’ rapid progress towards becoming a pure-play online business. New management confirms the strategy and meanwhile has drawn a line under legacy issues, while the balance sheet is adequate to deal with these and the operation’s development needs. We are materially raising our valuation to 324p and believe that, as Findel moves more fully online, there will be further upside to its revenue growth and, consequently, share price.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/16

410.6

24.8

23.0

0.0

7.9

0.0

03/17

457.0

22.2

20.4

0.0

8.9

0.0

03/18e

485.2

26.0

24.9

0.0

7.2

0.0

03/19e

507.6

28.5

27.3

0.0

6.6

0.0

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

A key strategic moment

This is a significant moment for Findel’s investment case. Results and management changes both confirm Express as the predominant business. With online sales jumping to 63%, the pure-play online strategy has been clearly articulated. A full round of provisions draws a line under legacy issues such as the liability for past financial products. While the smaller Education business trades in a difficult market, a process of focus is set to bring benefits such as product sourcing synergies.

An appropriate operating structure

Express’s revenue growth is in double digits, while its warehouse is already appropriately structured for online fulfilment, characterised by the need to pick diverse items efficiently in small quantities. Our analysis shows that its existing cost structures are already in line with larger online peers such as Amazon, ASOS and Gear4music. We forecast 17% PBT growth in FY18.

The right financial structure

Findel’s free cash flow is more than adequate for its needs. In FY17, after spending £11.7m to develop the financial services and customer service aspects of Express Gifts, it showed a FCF yield of 8.5%. Core bank debt, excluding the customer credit element, was only £22.6m, down £10.3m and c 0.5x EBITDA. This means that Findel has all the flexibility it needs to realise its online ambitions.

Valuation: Material increase in our valuation to 324p

We are materially increasing our sum-of-the parts valuation from 236p to 324p, fully reflecting legacy issues. However, with these results Findel has clarified its strategic pure-play online goal. Our work shows that its existing cost structure is already in line with such companies (which enjoy P/E valuations of c 70x) and, having observed the operation, we believe it has the potential to accelerate revenue growth and that, consequently, there is further valuation headroom.

Investment summary

Company description: Express is the significant profit earner

After some years of rationalisation Findel has emerged with one significant profit contributor, Express Gifts, the home shopping retailer trading under its brand Studio, which is increasingly moving online. Express also operates a related credit business. A smaller operation, Findel Education, serves the school supplies market, and a small Far Eastern sourcing business is in decline as an external player as a result of Express’s changing approach to the Far East.

Financials: We forecast 17% pre-tax growth

Findel’s FY17 results demonstrate significant sales growth of 10% on a 52-week basis at Express. Customer numbers were up 17% on a successful recruitment drive, although at a short-term margin cost, and margins were also affected by foreign exchange. The operating results of Findel Education and Overseas Sourcing were down on the year but are relatively immaterial. Mainly as a result of the lower margins in Express, pre-tax profit declined by 10% to £22.2m.

We are downgrading FY18e pre-tax profit by 7%, carrying forward the undershoot of our FY18 forecast, but projecting 17% year-on-year growth driven by revenue gains as well as margin improvement at Express:

Exhibit 1: Changes to forecasts

EPS (p)

PBT (£m)

EBITDA (£m)

 

Old

New

% chg

Old

New

% chg

Old

New

% chg

03/17

23.1

20.4

(11.7)

24.0

22.2

(7.4)

43.1

40.8

(5.4)

03/18e

26.8

24.9

(7.0)

28.0

26.0

(7.2)

48.1

46.5

(3.3)

03/19e

N/A

27.3

N/A

N/A

28.5

N/A

N/A

50.9

N/A

Source: Edison Investment Research

Valuation: Significant increase recognising online potential

We are materially increasing our sum-of-the parts valuation from 236p to 324p. With these results Findel has clarified its strategic goal to move inexorably to become a pure-play online retailer. Its existing cost structure is already in line with such companies and we believe from observing its business that it needs to make few fundamental changes to enjoy the greater revenue growth potential online, although it is focusing on appropriate measures such as digital marketing and improved online software. It has effectively bottomed out legacy issues, making full provision for past financial service product liabilities, recognising onerous leases on simplifying its locations, and modernising bad debt provisioning procedures, and these are reflected in our valuation.

Sensitivities: A UK retailer, albeit value driven

The main sensitivities we see are:

UK retail demand, although a cost squeeze is likely to relatively favour value retailers.

A potentially even tougher market for Education, although following the June election, the May government’s proposed hardline policies could be modified.

New regulatory intervention particularly affecting the financial services business.

A potential benefit from the introduction of the National Living Wage, with small cost impacts and a customer base likely to be beneficially affected.

Particularly as an online business, Findel could be exposed to cyberattacks. Management is well aware of this, and is taking protective action.

Company description: Increasingly an online business

Following some years of rationalisation, Findel now comprises two businesses, heavily weighted to the home shopping retailer Express Gifts, which accounted for 98% of FY17 operating profit. The education supplies business, Findel Education, made a small profit and an independent Far East supply chain business, Overseas Sourcing, a small loss. Express is now predominantly, and increasingly, an online business which benefits from the physical infrastructure that its catalogue retailing history provides. The Education business faces a challenging market with a mission to reverse a recent history of market share losses.

Based in Accrington, Lancashire, Express evolved from origins in general merchandise mail order based on a printed catalogue. It trades mainly through its Studio brand www.studio.co.uk (a second brand, Ace is effectively identical). The key proposition elements are low-cost value and personalisation. It has recently stepped up its apparel business based on Far East supply although, with a product mix of 30%, this has some way to go. It incorporates an integrated FCA approved credit business.

Strategy: “Moving inexorably” to 100% online

With its FY17 results Express Gifts unveils a new strategy of migrating the business to a ‘digital first’ approach. The move to online pure-play is customer driven: 63% of Express Gifts’ customers ordered online in FY17, from 56% in FY16 and a previous plateau close to 50%. However, in FY17 71% of newly recruited customers placed their first orders online. This increases to over 90% for younger customers aged under 35. Management, already committed to providing what its customers require, now sees “this figure inevitably approaching 100%”. The company is therefore planning for the investment and transformation required to keep pace with this digital evolution.

Express Gifts: The indicators are positive

Customer numbers, spend per customer and online ordering all moved ahead in FY17, reinforcing a previous trend.

Exhibit 2: Consistent forward progress on retail metrics

Source: Findel

Customer numbers, up 17% (19% on a rolling 12-month basis to date), benefited from the innovation of investment in recruitment in Q4 of the financial year, driven by Far East value products (although due to exchange rates these came at a lower margin). The increase in new customers also has a dampening effect on margins because of their acquisition and higher maintenance costs:

Exhibit 3: Customer profitability profile

Source: Findel

The bad debt percentage rose from what had proved to be an unsustainably low level in FY16 (which had unnecessarily curbed sales) as a result of a review of the balance between credit standards and sales.

Of Express’s 1.6 million active customers, 86% are female with the core market 25-55 years old, of whom 37% have children. Experian profile analysis shows that just over half of customers are from households with annual income below £30k. Coincidentally, an almost identical proportion of customers take credit averaging £350, which they pay off in an average of nine months (although customers have flexibility to match payments to their budgets and could take longer than this).

Traditional written and phone orders will continue to be catered for by the company, and it will continue to print its catalogue, but the strategy is now clear in terms of a specific objective to move towards a high mix of online sales. In line with this strategy, the company has increased marketing activity, particularly around TV and social media advertising, and has led the effort with ‘showcase’ promotional products such as the computer tablet at £19.99, which sold c 60,000 units, and ladies’ wraps at £2.99. It has also opened a Philippines call centre, which is already achieving UK customer service standards at lower cost.

The online channel continues to gain share within the UK retail market and represents a favourable tailwind for Express. We therefore regard both the fact that 63% of orders are now online, and the accelerated rate of growth of the online share, as significant. The average online order value is 10% higher than the offline equivalent, at £52. The cost to administer an online order is clearly lower than that of a telephone or written order, which requires manual intervention. 40% of customers buy personalised products; the personalisation process is more cost-effective online. Around half of customers pay their bills online.

The online channel also provides marketing opportunities. Express can track customer visits providing valuable information on dwell times, conversion rates, failed searches, complementarities and other customer statistics available for data analytics. That should result in better product selection, range structures, assortment mix, marketing approaches and therefore sales.

Financial services

Around 30% of Express’s revenue is from financial services to its customers, and over the past two years management has been successful in rebalancing product sales against financial services income, with an aim of stimulating product growth without customer detriment. In FY17 financial services income grew 12.6% on a like-for-like (52-week) basis against 15.6% for product sales, with credit account holders up by 9.1%. Towards the end of FY16 the company introduced ‘risk-based pricing’ where the rate of interest charged to customers is tailored to their credit risk. Currently, Express is well advanced in introducing its new credit account management system, “Financier”, which will offer significantly greater flexibility in the management of consumer credit and the range of credit products that can be offered to customers.

The Accrington warehouse

Express’s main distribution facility is housed in a modern warehouse at Accrington, near Manchester. We recently visited the facility, which consolidates an operation once spread between seven warehouses, manages around 3,000 SKUs and employs c 200 people. Different areas are connected by 3.5km of conveyor belts. The order processing system currently picks c 200,000 items per day with capacity to increase this to c 300,000. The Klug software relies on barcode identification and is capable of bringing together a typical basket of five to six items within a session. This may include goods such as clothing, cutlery or pencils, which go through a personalisation process to inscribe or embroider a name on the product, this being a popular and differentiating feature of Express’s offer. Personalisation operations take up c 75sq ft of the site. The system incorporates a double-check on order fulfilment, as a result of which the unit has a record of over 99% accuracy.

In short, from its origins in home delivery, the fulfilment structure is ideally established for a transition to high levels of online orders. Express is now focusing on adapting its front-end offer more specifically to the online marketplace. As part of its platform development, it has moved its websites to IBM’s Commerce platform, which includes new account management features and cyber security compliant with the EU's General Data Protection Regulation (GDPR), effective May 2018.

Findel Education: Strategies to optimise a difficult market

Findel Education is a leading independent educational resources supplier, serving educational establishments in all parts of the UK. Consolidating a number of smaller businesses, its main areas of operation are Stationery Essentials, Science, Art and Craft and Early Years. Its well-known brands include Hope, GLS, Philip Harris, Davies Sports and LDA.

As is well known, school funding is currently under pressure. Of the three main areas of expenditure, teaching, buildings and resources, the first two have inflexible features and therefore the latter is where the most pressure exists in practice. As a result, school resources spending across the five major educational resources suppliers reduced by 6.3% in FY17 (source: BESA market data). However, long-term fundamentals remain positive with pupil numbers expected to increase by 0.55 million between 2017 and 2022.

Within this difficult market, Findel Education’s strategy is centred on:

Value: a major synergy with Express will be exploited to drive significant product sourcing from the Far East (currently only 7% of products). This should result in lower pricing, improved competition and better margins.

Service: Education’s already high net promoter scores increased from 84% to 85% during FY17, and the division intends to build on this to maintain and increase customer loyalty.

Digital: currently only 18% of sales are through digital channels, which is below peers. The goal is to deliver to 50% of sales through digital channels within the next 24 months. Digital website and e-procurement solutions are to be upgraded from comparatively poor legacy systems to current standards. There is an overall objective to return the business to 10% return on sales.

During November 2016, a major business IT systems and warehouse integration programme was completed, with an investment of c £7m to produce a modernised distribution facility in Nottingham and a single core ERP IT system for the business. Further business simplification actions have also been identified to reduce costs and improve return on sales. Management expects this to deliver £3-4m of annual cost benefits over the next two years, while improving operational service levels.

The online marketplace: The retail divide deepens

Online retailing remains the top determinant of success in retail and is changing the face of the retail industry. In the ONS retail sales numbers for Q117, UK online sales grew year-on-year by 19.5%, against 4.8% for all retail, and represented c 15.5% of all retail spending. Traditional retailers continue to face challenges, with input cost pressures now adding to structural changes in demand to make investment returns increasingly difficult to achieve from terrestrial retailing. In the January 2017 edition of Edison Insight we wrote: “Relentless share gains in online will likely continue, riding long-term social trends. We expect further consolidation of physical store numbers as productivity pressures drive more retailers towards the ‘fewer, larger’ paradigm. And it is likely that the list of retail failures will lengthen.” Jaeger, Jones the Bootmaker and Agent Provocateur are among recent failures, while Woolworths and BHS remain monuments to the terrestrial general products retail segment of the past. Physical store numbers are set to decline 22% in the five years to 2018, according to forecasts by the Centre for Retail Research. However, online retail is forecast to grow 14% by value, according to the IMRG Capgemini eRetail Sales Index.

E-tailers are taking share in physical products

An e-tailer is defined as an online retailer without physical stores. Of the top 50 online retailers listed by IMRG for 2016, only 19 were e-tailers, and of those only 10 (Amazon, Apple, ASOS, EE, Telefonica O2, Three, Very, DIY, Littlewoods, Vodafone) sell physical products, four of which are phone companies (the rest are mainly travel companies like easyJet). Nonetheless, as Amazon, ASOS and Boohoo demonstrate, e-tailers selling physical product are positioned to take share and are actively doing so.

Management: Changes reflecting a simplified business

There have been significant management changes in the current year. In January 2017 David Sugden, who had been chairman for seven years, stood down as previously announced in February 2016. He was succeeded by Ian Burke, who was appointed executive chairman. Ian Burke has had a number of high-profile roles in consumer companies with a notable record in change management. He is currently chairman of The Rank Group, having previously overseen Rank as chief executive. In the past, Ian has served as chief executive of Thistle Hotels and has also held the position of managing director at both Holiday Inn Worldwide and Gala Clubs.

In April 2017, Phil Maudsley, previously managing director of Express Gifts, was appointed as chief executive. Phil has led the development of Express Gifts for over 20 years, and has been responsible for its transformation to a leading online retailer. At the same time, Ian Burke stepped back to become non-executive chairman, and Tim Kowalski, who had been FD since 2010, stepped down. Stuart Caldwell, previously group financial controller, became acting CFO and has now been appointed permanent CFO.

These management changes, reflecting the simplification of the group over the last five years from the five divisions to two, and equally the appointment as CEO of Phil Maudsley, with his extensive background in Express, indicates where the group’s strategic emphasis now lies.

Sensitivities

As a value retail operation across a horizontal range of product types, Express has broad exposure to UK retail demand, an area of likely challenge in the near future. Retail sales volumes (excluding fuel) rose by only 0.3% for the first quarter of 2017 (quarter-on-quarter), although this was an improvement on the final quarter of 2016 when they declined by 0.1%. However, this is a more ambiguous picture than, say, a year before when retail sales volumes increased 0.7%. Following the Brexit vote of June 2016, consumer demand has remained more resilient than many observers expected. However, average earnings increasing by 2.4% for the year to March 2017, less than inflation of 2.7% in the same period, may presage a period of perceived hardship among consumers. Although a shortage of disposable income may relatively favour value retailers, a significant cutback by customers would not be good for any retailer.

The return of an economically relatively hardline Conservative government in the UK may result in an even tougher market for Education, making it much more difficult to stabilise revenues even if it increased its market share. This would hamper the division’s recovery, although the warehouse savings expected in FY18 should be relatively unaffected. Following the June election result, however, it seems likely that some of the May government’s hardline policies could be modified.

Any financial services business is always vulnerable to greater regulatory intervention and tighter limits on operating freedom. Express has reviewed all of its products and satisfied itself that it has identified all those where redress would be required under current rules. Particularly, it has now completed a detailed account-by-account review of its liabilities to customers for the past sale of financial products that were not fit for purpose. However, the levels of redress could still change. Moreover, there remains a risk that limits could be imposed on the profitability of future products, albeit we are not aware of any specific proposals.

On a more positive note, Findel is one of the few retailers that might see a benefit from the introduction of the National Living Wage. The cost impact on its warehouse and call centre workforces is likely to be small, perhaps as little as £0.25m, while its customer cohort is likely to be beneficially affected.

Like any business, but particularly as an increasingly online one, the company could be exposed to cyberattacks. Management is well aware of this, and for example the move to IBM’s Commerce platform includes cyber security compliant with forthcoming EU regulatory standards.

Financials: Full year results to March 2017

Findel’s results demonstrated significant sales growth in its main operation, Express, although at a short-term margin cost. The operating results of its smaller businesses, Findel Education and Overseas Sourcing, were down on the year but are relatively immaterial:

Exhibit 4: Summary of FY17 results and forecasts

£m

FY16

FY17*

Growth

FY18e

Growth

FY19e

Growth

Express

313.0

363.3

16.1%

401.0

10.4%

427.9

6.7%

Education

94.4

91.7

-2.8%

82.6

-10.0%

78.4

-5.0%

Overseas Sourcing

3.2

2.0

-38.8%

1.6

-20.0%

1.3

-20.0%

Total

410.6

457.0

11.3%

485.2

6.2%

507.6

4.6%

Operating profit

Express

31.7

30.4

-4.1%

34.2

12.4%

37.6

10.0%

Express operating margin

10.1%

8.4%

-1.8%

8.5%

1.9%

8.8%

3.1%

Education

3.2

1.4

-56.0%

2.5

76.3%

3.9

58.0%

Overseas Sourcing

-0.3

-0.7

146.5%

-0.7

0.0%

-0.7

0.0%

Total**

34.7

31.1

-10.2%

36.0

15.6%

40.9

13.6%

Interest

-9.9

-8.9

-9.9%

-10.0

12.5%

-12.4

23.3%

PBT

24.8

22.2

-10.3%

26.0

16.9%

28.5

9.8%

Source: Findel, Edison Investment Research. Note: *53 weeks. **Pre-exceptional, but after amortisation and share-based payments.

Express’s revenue growth was 15.6% on a 52-week basis. However, this came at a margin cost of 0.4% on total Express revenue, resulting from the cost of recruitment, the higher maintenance cost of new customers, and heavier debt provisioning that the policy requires. All these disbenefits are expected to reverse over the first 18 months, and in fact the new customers should be higher margin as more of them are online. In addition, adverse foreign exchange affected margin for products sourced in the Far East. As a result, Express’s operating profit declined by £1.3m. Education suffered a larger decline of £1.8m as a direct result of more difficult trading and competition, with consolidation and synergy benefits not having yet come through.

Our FY18 forecast is driven by an assumed 10% revenue growth at Express, continuing to benefit from customers acquired in the second half of FY18, while we reflect some operating margin improvement from those customers (net of further customer acquisitions), driving 12.4% operating profit growth. At Education we forecast £3.5m benefit of warehouse rationalisations, together with variable cost savings, increasing operating profit to £2.5m despite continuing demand weakness. As a whole, we forecast a 16% improvement in operating profit and 17% growth in PBT to £26m.

Cash flow: More than adequate cash generation

Findel produces cash flow that is more than adequate for its needs. Although £8m of the £40.8m EBITDA in FY17 was absorbed by exceptionals, capital expenditure mainly to develop the financial services and customer service aspects of Express Gifts, was substantial at £11.7m, and the increase in customer business (increase in receivables net of securitisation inflows) appropriated £7.1m, with other working capital accounting for a £1.7m credit. With pensions and other items taking £2.6m, free cash flow was £13.3m, a yield of 8.5%.

Balance sheet: Core funding is increasingly strong

Allowing for the fact that the debt structure includes Findel’s substantial consumer credit business, the balance sheet is increasingly strong.

The lending business is funded by a £155m securitisation facility (increased during the year by £10m and maturing in 2019). For every £100 of credit extended to customers, £71 is drawn down from this facility, and therefore matched against customer receivables, which are appropriately provisioned on a formula basis consistent with IAS39. The other £29 is funded from bank facilities. This structure is typical of the home shopping market. Of total net debt of £225.0m at March 2017, securitised debt was £144.2m and net bank debt, shown below, was £80.8m.

Exhibit 5: Net debt reduction

Source: Findel

The core element of net bank debt continued its reducing path, down by £10.3m to £22.6m. Effectively, therefore, c 90% of net debt (£144.2m+£58.2m) now supports good credit receivables, with the £22.6m representing less than 0.5x EBITDA.

We forecast total net debt (including securitisation) to increase from £225.0m at March 2017 to £237.6m at March 2018, mainly on financial redress payments, and remaining flat in FY19. This is adequately covered by total facilities which are currently £265m (securitisation facility of £155m plus RCF £110m), although management believes the securitisation facility will be increased to fund growth.

Provisions and other exceptional items

Findel has significantly added to its provisions and impairments in FY17. The main reasons were:

a review of the bad debt provisioning process to bring it in line with industry best practice and more granular analysis (this has the effect of heavier provisioning against new customers with a higher release over the first years of the relationship: there is no cash implication;

a write-off of goodwill on brands that do not generate significant profits, mainly in Education. This has no cash effect; and

a detailed account-level review of the potential liability for past financial services products such as PPI. This issue has been running since FY15, but the latest detailed account-level investigation produced levels of liability that had not been expected under previous assumptions. There is a material cash impact over a period of up to two years while the allocation of redress is managed, although there may be some ex-customers which it ultimately proves impossible to identify.

Exhibit 6: Exceptional items

£m

FY16

FY17

FY17 provision

Reason

Bad debts

4.3

35.2

83.6

Impairment of Express Gifts receivables

Impairment of goodwill and other intangibles

-

21.8

Mainly write-down of Education purchased goodwill

Express Gifts financial services redress

14.4

14.7

26.0

Detailed account review

Onerous lease provisions

4.8

7.5

13.9

Reducing property portfolio

Restructuring costs

1.6

2.3

0.6

Other

1.4

0.6

 

Total (continuing operations')

26.5

82.1

40.5

Source: Findel, Edison Investment Research

Structured for an online future

Express Gifts’ evolution from a mail order background to its current, predominantly online status suggests that it already has the fulfilment capability to take it the rest of the way. An analysis of other retailers’ selling, distribution and admin costs is revealing. Clearly pure-play e-tailers show superior revenue growth, driven by the buoyancy of the online channel. This is a state that Express should be able to aspire to as it increases its online presence closer to 100%. We do not compare gross margin, since this is product-specific. However, the structure of selling and distribution costs reflects generally higher costs for more fully online businesses. We rank them by online sales percentage.

Exhibit 7: Online sales vs costs

Name

Ccy

Year
end

Online%

Revenue

Y1 growth
(%)

S&D

costs

As % of revenue

Admin costs

As % of revenue

Total expenses

As % of revenue

G4M

£m

Feb

100

56.1

58.2

12.5

22.3

Amazon

US$bn

Dec

100

136

22.4

24.8

18.2

18.7

13.8

43.5

32.0

ASOS

£m

Aug

100

1,444.9

32.7

216

14.9

443.2

30.7

659.2

45.6

Boohoo

£m

Feb (2017)

100

294.6

60.8

66.8

22.7

68.5

23.3

135.3

45.9

AO World

£m

Mar (2017)

100

701.2

12.2

53.0

7.6

61.4

8.8

114.4

16.3

N Brown

£m

Feb

69

635.9

2.1

246.7

38.8

130.6

20.5

377.3

59.3

Findel

£m

Mar

63

457.0

11.3

113.9

25.0

76.3

16.7

190.2

41.7

Next

£m

Jan (2017)

42**

4,097.3

-0.4

345.1

8.4

214.9

5.2

560.0

13.7

M&S

£m

Mar

17

10622

1.6

682.3

6.4

697.1

6.6

1379.4

13.0

Debenhams

£m

Aug

15

2,341.7

2.2

115.4

4.9

55.5

2.4

170.9

7.3

Sports Direct

£m

Jun

14*

2904

9.0

1019.5

35.1

JD Sports

£m

Jan (2017)

13**

2,738.7

16.5

813.0

29.7

106.3

0.0

919.3

33.6

Halfords

£m

Mar (2017)

12***

1,095.0

4.1

401.5

36.7

80.0

7.3

481.5

44.0

Source: Company results. Note: *2015. **Taken as Directory. ***2016. ****UK & Ireland.

Shown graphically (below), this indicates that pure-play e-tailers such as Amazon and Boohoo have costs of roughly 20% of sales, while those of largely terrestrial retailers such as M&S (17% online) and Debenhams (15% online) are closer to 10%.

Exhibit 8: Online sales vs SG&A costs

Exhibit 9: Online sales vs S&D costs (where disclosed)

Source: Company results

Source: Company results

Exhibit 8: Online sales vs SG&A costs

Source: Company results

Exhibit 9: Online sales vs S&D costs (where disclosed)

Source: Company results

Taking total SG&A costs (Exhibit 8), despite having 42% online sales (we assume equal to Directory sales), Next has an exemplary low cost base of 14% of sales. Sports Direct (c 14% online) has notably high total costs of 35% (we note that it does not separately disclose selling and distribution costs. Sports Direct has accumulated a 29% holding in Findel). The same trends are apparent for those retailers that separate out selling and distribution expenses in their reporting (Exhibit 9).

What is apparent at Findel is that both its total SG&A costs and its specific selling and distribution costs are already comparable with the cohort of pure-play e-tailers. This finding is important, as it suggests that (as Findel is structured for home delivery) the cost structure is unlikely to alter fundamentally as the proportion of online sales accelerates, as it is now doing.

Valuation

We are raising our sum-of-the parts valuation from 236p to 324p, as a result of a several factors:

1.

Increased rating of our reference stock N Brown for FY18. We refer to N Brown as it is the only listed retailer that is in a progression from mail order to online. We use N Brown’s P/E ratio discounted by the dividend yield to reflect the absence of a dividend at Findel. N Brown, now rated at a P/E of 13.0x, has enjoyed something of a re-rating as it has demonstrated strong online metrics, with online penetration increasing 4bp to 69% and online revenue growth of 10% year-on-year at its final results announcement in April 2017, metrics that are not dissimilar to Findel’s. However, the re-rating has been affected by the recent disclosure of flaws in past insurance products that are expected to result in an exceptional provision of £35-40m, another comparable feature between the two stocks.

2.

Our slightly lower profit forecast for Express, as described above.

3.

A revised assumed EBITDA multiple of 7x for the Education division (previously 8x). We have revised this down as a result of the continuing difficult educational market and the fact that we forecast a profitability decline. This is also consistent with the multiple in the recent acquisition of The Consortium by RM plc.

4.

Increase in our provision for past financial services product liabilities from 50% to 90%. It is clear that full redress must be provided in all cases; although there may be some time delay, there could be some related sales uplift, and ultimately it may be impossible to identify a small proportion of customers.

5.

Reduction in the balance sheet pension deficit from £12.8m to £5.4m.

We do not reflect the onerous leases provision in our valuation as our forecasts already reflect actual rents payable.

Exhibit 10: Sum-of-the-parts valuation

£m

Basis

Metric

Multiple

Value

Express (incl securitisation facility)

NOPAT FY18

27.0

335.2

Overseas resourcing

NOPAT FY18

-0.6

 

Total

26.5

12.4

328.3

Education

Estimated FY18 EBITDA

8.8

7.0

61.4

Enterprise value

389.7

Core net debt

Dec-16

(80.8)

Pension deficit

Balance sheet

(5.4)

Cash provisions on financial products

90% of provision

(23.4)

Equity value

280.1

# shares (m)

86.4

SOTP value per share (p)

324p

Source: Edison Investment Research

Our valuation of 324p would equate to a P/E ratio of 13.0x for FY18e, falling to 11.9x for FY19e, which is close to the current rating of N Brown. However, as we show above (see ‘Structured for an online future’), Findel has a cost structure that is already more closely aligned with pure-play online retailers such as ASOS, Boohoo and Gear4music, which enjoy Year 1 P/E ratings of between 74x and 76x earnings. Even if a material discount were taken for the smaller size of Findel, the steps it still needs to take to develop as a pure-play retailer and allowance for past issues, this reference would suggest much higher headroom for the share price.

Exhibit 11: Financial summary

£'000s

2014

2015

2016

2017*

2018e

2019e

Mar

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

402,200

406,930

410,601

457,030

485,170

507,603

Cost of Sales

(265,468)

(215,146)

(214,621)

(238,470)

(254,840)

(265,975)

Gross Profit

136,732

191,784

195,980

218,560

230,330

241,628

EBITDA

 

 

43,320

45,136

41,758

40,785

46,536

50,926

Operating Profit (before amort. and except.)

 

39,224

41,686

37,264

33,299

38,830

43,850

Intangible Amortisation

(2,848)

(3,029)

(2,348)

(1,959)

(1,818)

(1,957)

Operating profit pre exc post intang amortisation

36,376

38,657

34,916

31,340

37,012

41,893

Exceptionals

(16,928)

(27,036)

(25,458)

(82,152)

0

0

Other/share based payments

(1,698)

(861)

(239)

(191)

(1,000)

(1,000)

Operating Profit

17,750

10,760

9,219

(51,003)

36,012

40,893

Net Interest

(9,876)

(10,097)

(9,901)

(8,920)

(10,034)

(12,371)

Financial exceptional items

(472)

(136)

(998)

556

0

0

Profit Before Tax (norm)

 

 

24,802

27,699

24,776

22,229

25,978

28,522

Profit Before Tax (FRS 3)

 

 

7,402

527

(1,680)

(59,367)

25,978

28,522

Tax

(1,857)

(5,323)

91

1,659

(5,455)

(5,990)

Profit After Tax (norm)

22,563

21,994

19,785

17,616

21,522

23,532

Profit After Tax (FRS 3)

2,219

(25,261)

(10,196)

(57,708)

20,522

22,532

Average Number of Shares Outstanding (m)

84.8

85.2

86.1

86.3

86.3

86.3

EPS - normalised (p)

 

 

23.7

25.8

23.0

20.4

24.9

27.3

EPS - normalised and fully diluted (p)

 

19.9

22.2

20.3

18.0

22.0

24.1

EPS - (IFRS) (p)

 

 

2.6

(29.7)

(11.8)

(66.8)

23.8

26.1

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

34.0

47.1

47.7

47.8

47.5

47.6

EBITDA Margin (%)

10.8

11.1

10.2

8.9

9.6

10.0

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

9.8

10.2

9.1

7.3

8.0

8.6

BALANCE SHEET

Fixed Assets

 

 

133,047

94,428

92,927

79,012

78,488

78,455

Intangible Assets

90,337

50,217

47,322

26,185

29,367

32,410

Tangible Assets

34,644

35,070

41,423

44,417

40,711

37,636

Investments

8,066

9,141

4,182

8,410

8,410

8,410

Current Assets

 

 

301,960

328,250

321,279

301,265

317,211

332,192

Stocks

64,406

65,405

53,472

57,108

61,828

65,711

Debtors

213,284

224,375

229,848

212,648

226,479

237,932

Cash

24,270

38,470

34,405

29,173

27,157

26,802

Other

0

0

3,554

2,336

1,748

1,748

Current Liabilities

 

 

(82,861)

(82,340)

(76,191)

(91,789)

(81,300)

(86,715)

Creditors

(82,861)

(82,340)

(75,673)

(91,244)

(80,782)

(86,197)

Short term borrowings

0

0

(518)

(545)

(518)

(518)

Long Term Liabilities

 

 

(240,498)

(257,628)

(259,140)

(271,785)

(277,206)

(272,215)

Long term borrowings

(231,223)

(245,021)

(250,569)

(253,603)

(264,192)

(264,192)

Other long term liabilities

(9,275)

(12,607)

(8,571)

(18,182)

(13,014)

(8,023)

Net Assets

 

 

111,648

82,710

78,875

16,703

37,193

51,717

CASH FLOW

Operating Cash Flow

 

 

26,097

19,250

8,889

12,280

7,111

30,005

Net Interest

(9,482)

(9,938)

(9,549)

(9,103)

(10,034)

(12,371)

Tax

(998)

(1,396)

(2,494)

148

345

(5,990)

Capex

(11,831)

(10,269)

(15,940)

(11,724)

(10,000)

(12,000)

Acquisitions/disposals

15,461

1,720

11,115

1,168

0

0

Financing

0

(500)

0

0

0

0

Dividends

0

0

0

0

0

0

Net Cash Flow

19,247

(1,133)

(7,979)

(7,231)

(12,578)

(355)

Opening net debt/(cash)

 

 

226,168

206,953

206,551

216,682

224,975

237,553

HP finance leases initiated

0

0

0

0

0

0

Other

(32)

1,535

(2,152)

(1,062)

(0)

(0)

Closing net debt/(cash)

 

 

206,953

206,551

216,682

224,975

237,553

237,908

Source: Company accounts, Edison Investment Research. Note: *53 weeks.

Contact details

Revenue by geography

Findel
Church Bridge House,
Henry St,
Church,
Accrington
BB5 4DW
+44 (0)1254 382121
http://www.findel.co.uk

Contact details

Findel
Church Bridge House,
Henry St,
Church,
Accrington
BB5 4DW
+44 (0)1254 382121
http://www.findel.co.uk

Revenue by geography

Management team

Chairman: Ian Burke

Chief Executive: Phil Maudsley

Ian Burke joined the board on 12 January 2017. He has spent the majority of his career in the leisure industry and is currently chairman of The Rank Group, having previously overseen the growth of that business as chief executive. Previously, he has served as chief executive of Thistle Hotels and has also held the position of managing director at both Holiday Inn Worldwide and Gala Clubs.

Philip Maudsley joined the group in 1987 as general manager of a manufacturing subsidiary. He became managing director of the Home Shopping division in 1994 and was appointed to the board on 6 April 2004. He was subsequently appointed group managing director in December 2004, chief operating officer in May 2006 and chief executive in November 2009. He was appointed managing director of the Home Shopping division in September 2010.

Chief Financial Officer: Stuart Caldwell

Stuart has held the position of Acting CFO since April 2017, prior to which he was Group Financial Controller. He is a qualified Chartered Accountant and a fellow of the Association of Corporate Treasurers. After qualifying within the profession he held a number of roles with Provident Financial plc before moving to Findel in 2010.

Management team

Chairman: Ian Burke

Ian Burke joined the board on 12 January 2017. He has spent the majority of his career in the leisure industry and is currently chairman of The Rank Group, having previously overseen the growth of that business as chief executive. Previously, he has served as chief executive of Thistle Hotels and has also held the position of managing director at both Holiday Inn Worldwide and Gala Clubs.

Chief Executive: Phil Maudsley

Philip Maudsley joined the group in 1987 as general manager of a manufacturing subsidiary. He became managing director of the Home Shopping division in 1994 and was appointed to the board on 6 April 2004. He was subsequently appointed group managing director in December 2004, chief operating officer in May 2006 and chief executive in November 2009. He was appointed managing director of the Home Shopping division in September 2010.

Principal shareholders

(%)

Sports Direct

29.9

Schroders

18.5

Toscafund

17.4

Aberforth Partners

4.1

Norges Bank

4.8

Standard Life

4.2

Henderson Group

3.0

Companies named in this report

The Rank Group (RNK), Gear4music (G4M), Amazon (AMZN), ASOS (ASC), Boohoo (BOO), AO World (AO.), N Brown (BWNG), Next (NXT), M&S (MKS), Debenhams (DEB), Sports Direct (SPD), JD Sports (JD), Halfords (HFD), RM (RM.), Provident Financial (PFG)

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Findel and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Findel and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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