Findel |
Customers boarding Express |
Trading update |
Retail |
27 January 2017 |
Share price performance
Business description
Next events
Analysts
Findel is a research client of Edison Investment Research Limited |
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Findel has reported further encouraging progress in its largest business, online value retailer Express Gifts. Customer acquisition is progressing faster than expected. While this imposes a drag on short-term profits growth, it enhances longer-term potential. This is not fully reflected in the current ratings, which result in a FY18e PEG ratio of 0.8x. Our sum-of-the-parts (SOTP) valuation is 265p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/15 |
406.9 |
27.7 |
25.8 |
0.0 |
8.0 |
N/A |
03/16 |
410.6 |
24.8 |
23.0 |
0.0 |
9.0 |
N/A |
03/17e |
459.4 |
25.5 |
24.5 |
0.0 |
8.4 |
N/A |
03/18e |
498.6 |
28.0 |
26.8 |
0.0 |
7.7 |
N/A |
Note: *PBT and EPS are normalised, excluding exceptional items and share-based payments.
Strong trading
Findel has reported group sales growth of over 11% in the 16 weeks since 1 October. In its most important trading period, Express Gifts generated a 14% revenue increase, driven by 15% growth in product sales. Education, in a relatively quiet period for that business, further slowed the pace of its sales decline to 1.7%.
Estimates trimmed but business strengthened
Our estimates for Education are broadly unchanged. However, we have trimmed our profit estimates for Express to reflect the continuing success of its customer recruitment programme. Clearly, the increasing customer base enhances the business’s potential in the longer term. However, in the short term it imposes a drag on profits growth because new customers do not offset the costs to recruit them in their first quarter. The increased volumes of Far East-sourced product resulting from faster revenue growth will increase the currency headwinds that were already expected.
Valuation: Undemanding
Bearing in mind the extent to which Express dominates the group and the appeal of its online value proposition, an FY17e P/E of 8.4x is far from generous when seen in the context of the multiples of other online retailers. For that matter, it represents a meaningful discount to the forward multiple of its nearest comparator, N Brown, of 9.8x. One has to concede that N Brown is supported by an attractive dividend yield and we do not expect Findel to commence dividend payments in the near future. It is true that Findel carries a heavy net debt burden, but equally the case that this is well supported by a high-quality consumer credit book. We expect year-end core net debt to represent less than 2x EBITDA. Our SOTP valuation, which reflects the increase in the N Brown rating since our last update note (9 December), increases from 252p to 265p.
Trading update
Express Gifts
Findel’s largest business (c 90% FY18e EBIT), online value retailer Express Gifts, performed well during its peak trading season. In the 16 weeks since 1 October, Express’ total sales increased by 14%, within which product sales increased 15.0%. All product categories increased sales, with household and clothing particularly strong.
Express’s focus this year has been on customer recruitment. Plans to increase the customer base have clearly succeeded: the number of customers increased by 13% to 1.56m at the end of December. In addition, Express improved customer retention through a number of actions including improvements to websites that were launched in April 2016.
Education
Findel Education saw a continuation of its improving sales trends in this relatively quiet period in its year, with the year-on-year sales decline narrowing from 5.4% at the half-year to 1.7% in H2 to date. As previously reported, its major warehouse consolidation project has now been successfully completed which should deliver cost benefits in a full year of c £3m.
Exceptional items
Having incurred exceptional charges of £3.8m in H1, Findel expects to incur a further c £4m of charges in H2, taking the FY17 total to c £8m. Roughly half of the H2 charge will relate to non-cash impairment charges covering the write-off of redundant brands within Express and the legacy website in Education that will be replaced later this year. The remaining c £2m of cash charges covers reorganisation costs within Express that management estimates will have a two-year payback. Reassuringly, there has been no change to the provision required for financial services redress and refunds.
Further strengthening of finances
Improving finances have been a recurring theme of recent years and continue. Findel reduced core net bank debt (excluding finance leases) by £9.3m to £81.8m at the end of December 2016, despite strong growth in the working capital requirements to support Express Gifts' additional recruitment.
Estimates
Findel noted within its update that it expects FY17 PBT to be broadly within the range of existing estimates, which Findel believes lies between £25.5m and £26.1m. We have reduced our FY17e PBT estimate by c £0.5m to £25.5m to reflect the changes in plans within Express.
We have increased our revenue forecast for Express to reflect the strong growth in customer numbers and Express’s stated plan to extend its recruitment activity for the first time into the final quarter. However, the additional stock of good-value products purchased from the Far East in US dollars to support this TV and digital recruitment activity will produce a lower product margin following the weakening of sterling. Moreover, we assume that the increased number of customers has led to a further increase in the bad debt ratio towards the level that management regards as optimal. We have also reflected the fact that new customers do not buy enough in their first three months to cover Express’s costs to recruit them, ie there is a profit drag from new customers that unwinds progressively. This final element is the principal factor explaining why we have reduced our FY17e Express EBIT estimate by c £0.5m to £35.1m.
The rate of sales decline within Education was slightly better than we modelled for H2. However, it covers a relatively less important trading period for the division so the impact is marginal.
Our net debt estimate has increased to reflect the working capital needs attending the growth in customer numbers. However, we expect core net bank debt, which excludes borrowings used to finance Express’s credit book, to be broadly in line with our previous estimate of c £80m. On that basis, core net bank debt will fall below 2x EBITDA, a key milestone in Findel’s financial rehabilitation.
Exhibit 1: Changes to estimates
EPS (p) |
PBT (£m) |
EBITDA (£m) |
|||||||
Old |
New |
% chg |
Old |
New |
% chg |
Old |
New |
% chg |
|
03/17e |
24.9 |
24.5 |
-1.6% |
26.0 |
25.5 |
-1.8% |
45.0 |
44.6 |
-0.8% |
03/18e |
27.3 |
26.8 |
-2.0% |
28.6 |
28.0 |
-2.2% |
48.4 |
48.1 |
-0.7% |
Source: Edison Investment Research
Valuation
Although we have trimmed our FY17e estimates for Findel, our sum-of-the-parts valuation has increased from 252p to 265p. The principal reason for this increase is the performance of N Brown shares, the nearest benchmark for Express, since we last updated our valuation. We have increased the rating that we apply to Express within the SOTP to reflect that, although we discount the N Brown rating in our model to reflect its attractive dividend yield and the absence of a dividend at Findel. We have also updated net debt within the model to the latest value provided by management in the trading update and used the most recent pension deficit from the interim statement.
Exhibit 2: Sum-of-the-parts valuation
£'000s |
Basis |
Metric |
Multiple |
Value |
Express (incl securitisation facility) |
Estimated NOPAT FY17 |
27,716 |
9.2 |
254,508 |
Education |
Estimated FY18 EBITDA |
9,127 |
8.0 |
73,815 |
FASL |
Estimated NOPAT FY17 |
-459 |
9.2 |
-4,219 |
Enterprise value |
324,104 |
|||
Core net debt |
December 2016 via Q3 trading update |
(81,800) |
||
Pension deficit |
Interim balance sheet 30 September 2016 |
(12,846) |
||
Equity value |
229,458 |
|||
# shares |
86,443 |
|||
SOTP value per share (p) |
265p |
Source: Findel, Edison Investment Research
The FY17e and FY18e P/Es at 265p would be 10.8x and 9.9x respectively, neither of which we would regard as challenging. The EV/EBITDA ratios for those two years would be 10.4x and 10.0x. However, we note that most of Findel’s debt is funding Express Gifts’ high-quality consumer credit book. We model core net bank debt to be less than 2x EBITDA at the end of FY17. If one excluded the funding for consumer credit from EV, the EV/EBITDA ratios for FY17e and FY18e would be 5.8x and 5.4x respectively.
There are concerns about UK-government-imposed cost increases in the retail sector this year, although it is important to stress that these will have a much smaller impact on Findel than on many other retailers, particularly store-based ones. There are further concerns in some quarters that UK consumer demand will suffer badly from Brexit fears, albeit retail trade has held up well since June. Moreover, we have trimmed our profit estimates for the next two years although that is because of the success of a customer recruitment programme that we believe increases longer-term earnings potential. We acknowledge therefore that there are justifications for caution. However, on current estimates, the FY18e PEG ratio is 0.8x, which appears unduly severe.
Exhibit 3: Financial summary
£'000s |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
||
March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
491,233 |
402,200 |
406,930 |
410,601 |
459,365 |
498,615 |
Cost of Sales |
(254,481) |
(265,468) |
(215,146) |
(213,479) |
(237,101) |
(260,545) |
||
Gross Profit |
236,752 |
136,732 |
191,784 |
197,122 |
222,264 |
238,070 |
||
EBITDA |
|
|
31,999 |
43,320 |
45,136 |
41,758 |
44,610 |
48,077 |
Operating Profit (before amort. and except.) |
|
26,787 |
39,224 |
41,686 |
37,264 |
38,584 |
41,991 |
|
Intangible Amortisation |
(2,621) |
(2,848) |
(3,029) |
(2,348) |
(1,930) |
(2,027) |
||
Operating profit pre exc post intang amortisation |
24,166 |
36,376 |
38,657 |
34,916 |
36,654 |
39,964 |
||
Exceptionals |
(11,031) |
(16,928) |
(27,036) |
(25,458) |
(3,167) |
0 |
||
Other/share based payments |
(1,847) |
(1,698) |
(861) |
(239) |
(1,000) |
(1,000) |
||
Operating Profit |
11,288 |
17,750 |
10,760 |
9,219 |
32,487 |
38,964 |
||
Net Interest |
(10,523) |
(9,876) |
(10,097) |
(9,901) |
(10,131) |
(10,995) |
||
Financial exceptional items |
(283) |
(472) |
(136) |
(998) |
735 |
0 |
||
Profit Before Tax (norm) |
|
|
11,796 |
24,802 |
27,699 |
24,776 |
25,522 |
27,970 |
Profit Before Tax (FRS 3) |
|
|
482 |
7,402 |
527 |
(1,680) |
23,090 |
27,970 |
Tax |
1,103 |
(1,857) |
(5,323) |
91 |
(4,563) |
(5,874) |
||
Profit After Tax (norm) |
12,130 |
22,563 |
21,994 |
19,785 |
21,153 |
23,096 |
||
Profit After Tax (FRS 3) |
2,890 |
2,219 |
(25,261) |
(10,196) |
18,527 |
22,096 |
||
Average Number of Shares Outstanding (m) |
84.8 |
84.8 |
85.2 |
86.1 |
86.3 |
86.3 |
||
EPS - normalised (p) |
|
|
14.3 |
23.7 |
25.8 |
23.0 |
24.5 |
26.8 |
EPS - normalised and fully diluted (p) |
|
12.1 |
19.9 |
22.2 |
20.3 |
21.6 |
23.6 |
|
EPS - (IFRS) (p) |
|
|
3.4 |
2.6 |
(29.7) |
(11.8) |
21.5 |
25.6 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
48.2 |
34.0 |
47.1 |
48.0 |
48.4 |
47.7 |
||
EBITDA Margin (%) |
6.5 |
10.8 |
11.1 |
10.2 |
9.7 |
9.6 |
||
Operating Margin (before GW and except.) (%) |
5.5 |
9.8 |
10.2 |
9.1 |
8.4 |
8.4 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
140,839 |
133,047 |
94,428 |
92,927 |
98,706 |
99,594 |
Intangible Assets |
100,892 |
90,337 |
50,217 |
47,322 |
47,638 |
50,611 |
||
Tangible Assets |
31,329 |
34,644 |
35,070 |
41,423 |
43,041 |
40,955 |
||
Investments |
8,618 |
8,066 |
9,141 |
4,182 |
8,028 |
8,028 |
||
Current Assets |
|
|
327,016 |
301,960 |
328,250 |
321,279 |
334,850 |
366,496 |
Stocks |
58,896 |
64,406 |
65,405 |
53,472 |
58,889 |
64,658 |
||
Debtors |
210,234 |
213,284 |
224,375 |
229,848 |
263,900 |
294,777 |
||
Cash |
34,023 |
24,270 |
38,470 |
34,405 |
10,536 |
5,536 |
||
Other |
23,863 |
0 |
0 |
3,554 |
1,525 |
1,525 |
||
Current Liabilities |
|
|
(86,941) |
(82,861) |
(82,340) |
(76,191) |
(80,805) |
(85,242) |
Creditors |
(86,941) |
(82,861) |
(82,340) |
(75,673) |
(80,273) |
(84,710) |
||
Short term borrowings |
0 |
0 |
0 |
(518) |
(532) |
(532) |
||
Long Term Liabilities |
|
|
(280,443) |
(240,498) |
(257,628) |
(259,140) |
(263,514) |
(274,346) |
Long term borrowings |
(259,176) |
(231,223) |
(245,021) |
(250,569) |
(245,252) |
(255,252) |
||
Other long term liabilities |
(21,267) |
(9,275) |
(12,607) |
(8,571) |
(18,262) |
(19,094) |
||
Net Assets |
|
|
100,471 |
111,648 |
82,710 |
78,875 |
89,238 |
106,502 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
26,500 |
26,097 |
19,250 |
8,889 |
2,692 |
10,868 |
Net Interest |
(10,000) |
(9,482) |
(9,938) |
(9,549) |
(9,709) |
(10,995) |
||
Tax |
(1,761) |
(998) |
(1,396) |
(2,494) |
(4,000) |
(5,874) |
||
Capex |
(8,259) |
(11,831) |
(10,269) |
(15,940) |
(9,927) |
(9,000) |
||
Acquisitions/disposals |
0 |
15,461 |
1,720 |
11,115 |
2,318 |
0 |
||
Financing |
0 |
0 |
(500) |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
6,480 |
19,247 |
(1,133) |
(7,979) |
(18,626) |
(15,000) |
||
Opening net debt/(cash) |
|
|
230,659 |
226,168 |
206,953 |
206,551 |
216,682 |
235,248 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1,989) |
(32) |
1,535 |
(2,152) |
60 |
0 |
||
Closing net debt/(cash) |
|
|
226,168 |
206,953 |
206,551 |
216,682 |
235,248 |
250,248 |
Source: Findel, Edison Investment Research
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