Appreciate Group |
Gaining momentum |
Q3 trading update |
Financial services |
12 January 2021 |
Share price performance
Business description
Next events
Analyst
Appreciate Group is a research client of Edison Investment Research Limited |
Sales performance continued to improve in the seasonally important Q321 period. Core billings were well ahead of the prior year and December was the strongest month ever. Management is confident H221 will see the normal swing back to profitability, with the full-year performance at least in line with its expectations that underlay the H121 reinstatement of dividends. Accelerated digitalisation of the business has mitigated the effects of the pandemic, supported the Q321 progress, and positions it well for sustainable growth beyond the current financial year.
Year end |
Billings* |
Revenue |
Adj. PBT** |
EPS*** |
DPS |
P/E |
Yield |
03/19 |
426.9 |
110.4 |
12.5 |
4.8 |
3.20 |
6.9 |
9.7 |
03/20 |
419.9 |
112.7 |
11.4 |
4.9 |
0.00 |
6.7 |
0.0 |
03/21e |
360.9 |
93.5 |
4.2 |
1.9 |
1.20 |
17.1 |
3.6 |
03/22e |
392.3 |
101.0 |
7.1 |
3.1 |
1.50 |
10.7 |
4.5 |
Note: *Billings is a non-statutory measure of sales defined as the face value of voucher sales and the net amount of value loaded on prepaid cards/digital products. **PBT is adjusted for exceptional items. ***EPS is fully diluted and adjusted for exceptional/non-recurring items.
Strong Q3 growth led by digital
Core underlying billings (excluding Christmas Savings billings, which are driven by fulfilment of the annual order book) were up 13.1% to £96.3m in Q321 (three months to 31 December 2020) compared with Q320 and December (billings of £45.5m/+41.7%) was Appreciate Group’s (APP’s) strongest month ever. Continuing momentum in digital sales drove the Q3 growth with an almost four-fold increase to £22.5m (Q320: £5.9m). The free cash position increased to £33.5m from £24.9m at H121. Although the latest lockdown measures may delay some revenue and profit recognition until customers have more opportunity to redeem their products, management expects the full-year performance to be at least in line with its mid-range scenario described in the 2020 annual report.
Well placed for further growth
APP has continued to progress its strategic business plan, aimed at building a more robust and scalable business model capable of capitalising on growth opportunities in the large and fragmented market in which the group operates. The progress made to date, enhancing operating systems and processes and putting a greater focus on digital products and services, mitigated the pandemic’s effects in H121 and is delivering growth in Q3 by positioning the group to better exploit existing industry trends and deliver sustainable growth. Business simplification has continued with the wind-down/sale of FMI, contract packing and the Irish businesses, allowing management to focus on driving the core business.
Valuation: Not yet anticipating recovery
Our forecasts and modified DCF valuation of 60p per share are unchanged. The DCF looks through the near-term suppression of earnings by the pandemic and ‘one-time’ cash flow adjustment from business mix changes away from paper vouchers to card/digital. It implies a calendar year 2021 P/E of c 21x and yield of 3.3%, reasonable in a ‘peer group’ context and in view of APP’s growth ambitions.
Additional details
Steady progress in billings since April low
Exhibit 1 shows the steady progress of core underlying billings from April 2020 when the pandemic lockdown was first introduced. Core underlying billings includes the Corporate business and Highstreetvouchers.com (HSV) but excludes Christmas Savings. Christmas savings billings are driven by Christmas order despatches, primarily in the second half of the year, from an order book built primarily in the first half of the year. Positively, the Christmas 2020 order book has ended up c 8% lower year on year compared with earlier indications of c 10%. Also not included in Exhibit 1 is c £12m of billings in respect of the free summer school meals partnership with Iceland, one-off in nature and relatively low margin. Including this, core billings were £166.0m in the nine months to end-December 2020, at a similar level to the first nine months of FY20.
Exhibit 1: Steady progress in billings since April low
Corporate and HSV billings (£m) |
Apr |
May |
June |
July |
Aug |
Sept |
H121 |
Oct |
Nov |
Dec |
Q321 |
9M21 |
FY21 |
5.0 |
7.4 |
8.6 |
11.8 |
10.2 |
14.9 |
57.9 |
24.0 |
26.8 |
45.5 |
96.3 |
154.2 |
FY20 |
14.0 |
13.7 |
13.8 |
14.4 |
12.4 |
13.0 |
81.2 |
26.4 |
26.6 |
32.1 |
85.1 |
166.3 |
YoY change |
-63.9% |
-46.5% |
-37.5% |
-17.6% |
-17.7% |
+14.8% |
-40.2% |
-9.3% |
0.9 |
41.7 |
13.1% |
-7.3% |
Source: Appreciate Group
Corporate billings were up 12% in Q320, including a 42% y-o-y increase in December driven by clients rewarding employees, with record levels of business from new clients during the quarter. Billings via Highstreetvouchers.com were up 36% y-o-y in Q321. The strong growth in digital product was supported by the promotion of Love2shop e-codes and the launch of the Love2shop contactless digital card. Enhancements to digital marketing led to APP achieving an increased share of search demand volume in the core gift card category during November and December. Performance compared with the prior year also reflects improvements in core online systems that in FY20 forced a curtailment in order intake, including the temporary imposition of a minimum order value, as a result of volume and load issues. Further improvements are planned during FY21 through the implementation of the new enterprise resource planning system that will provide a more robust and scalable system to support future growth.
No change to forecasts
We have made no changes to our forecasts set out in detail in our December update note. The progress in Q321 suggests that FY21 billings may exceed our forecast but this may be offset in terms of revenues by the further pandemic restrictions, which are likely to slow the redemption of products by customers; slower redemption of multi-retailer redemption products delays the recognition of revenues and earnings, although only deferring this to future periods.
The increased free cash position at 31 December 2020 of £33.5m is above the level that we forecast for end-FY21 (£21.8m) and will have benefitted from the billing of unregulated voucher product in the run-up to Christmas. The despatched vouchers will act as a drag on free cash as they are redeemed. As explained in our December update note and in more detail in our September outlook note, we expect the growth of higher margin but less immediately cash generative regulated card/digital product (versus paper vouchers) to act as a temporary drag on reported cash flows during the next two years, but this one-time adjustment is allowed for within our DCF valuation. The recently arranged £15.0m revolving credit facility remains undrawn and ready to support growth.
Exhibit 2: Financial summary
Year end 31 March |
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021e |
2022e |
2023e |
PROFIT & LOSS |
||||||||||
Consumer billings |
196,796 |
208,352 |
216,771 |
232,635 |
232,096 |
222,207 |
194,416 |
192,532 |
197,463 |
|
Corporate billings |
176,091 |
176,679 |
187,741 |
180,151 |
194,805 |
197,650 |
166,500 |
199,800 |
219,720 |
|
Total Billings |
|
372,887 |
385,031 |
404,512 |
412,786 |
426,901 |
419,857 |
360,916 |
392,332 |
417,183 |
Revenue |
|
85,769 |
100,556 |
119,637 |
111,054 |
110,394 |
112,724 |
93,461 |
100,995 |
107,429 |
Cost of sales |
(59,193) |
(72,030) |
(89,944) |
(79,628) |
(79,117) |
(79,778) |
(67,760) |
(72,211) |
(76,275) |
|
Gross profit |
26,576 |
28,526 |
29,693 |
31,426 |
31,277 |
32,946 |
25,702 |
28,784 |
31,155 |
|
Gross margin as % billings |
7.1% |
7.4% |
7.3% |
7.6% |
7.3% |
7.8% |
7.1% |
7.3% |
7.5% |
|
Distribution costs |
(2,761) |
(2,909) |
(2,940) |
(3,002) |
(2,934) |
(2,838) |
(1,805) |
(1,765) |
(1,669) |
|
Administrative expenses excluding depreciation & amortisation |
(14,914) |
(15,176) |
(16,348) |
(15,702) |
(16,007) |
(18,377) |
(17,887) |
(17,850) |
(18,052) |
|
EBITDA |
|
8,901 |
10,441 |
10,405 |
12,722 |
12,336 |
11,731 |
6,010 |
9,168 |
11,434 |
Depreciation & amortisation |
0 |
0 |
0 |
(1,405) |
(1,394) |
(1,659) |
(2,113) |
(2,350) |
(2,350) |
|
Operating profit before exceptional items |
|
8,901 |
10,441 |
10,405 |
11,317 |
10,942 |
10,072 |
3,897 |
6,818 |
9,084 |
Exceptional items |
0 |
0 |
0 |
0 |
(1,210) |
(3,676) |
(989) |
0 |
0 |
|
Operating profit |
|
8,901 |
10,441 |
10,405 |
11,317 |
9,732 |
6,396 |
2,908 |
6,818 |
9,084 |
Net Interest |
1,245 |
1,457 |
1,470 |
1,270 |
1,572 |
1,304 |
263 |
296 |
322 |
|
Profit Before Tax & exceptional items |
|
10,146 |
11,898 |
11,875 |
12,587 |
12,514 |
11,376 |
4,161 |
7,114 |
9,406 |
Profit before tax |
|
10,146 |
11,898 |
11,875 |
12,587 |
11,304 |
7,700 |
3,172 |
7,114 |
9,406 |
Tax |
(2,284) |
(2,177) |
(2,361) |
(2,398) |
(2,422) |
(2,189) |
(603) |
(1,352) |
(1,787) |
|
Profit after tax (IFRS) |
|
7,862 |
9,721 |
9,514 |
10,189 |
8,882 |
5,511 |
2,569 |
5,762 |
7,619 |
Average number of shares (m) |
182.5 |
183.7 |
183.9 |
185.3 |
186.0 |
186.3 |
186.3 |
186.3 |
186.3 |
|
Fully diluted average number of shares (m) |
184.7 |
187.2 |
187.2 |
185.9 |
186.1 |
186.3 |
186.3 |
186.3 |
186.3 |
|
Basic EPS - IFRS (p) |
|
4.3 |
5.3 |
5.2 |
5.5 |
4.8 |
3.0 |
1.4 |
3.1 |
4.1 |
Fully diluted EPS - IFRS (p) |
|
4.3 |
5.2 |
5.1 |
5.5 |
4.8 |
3.0 |
1.4 |
3.1 |
4.1 |
Adjusted EPS (excludes exceptional/nonrecurring items) |
|
4.3 |
5.2 |
5.1 |
5.5 |
4.8 |
4.9 |
1.9 |
3.1 |
4.1 |
Dividend per share (p) |
2.40 |
2.75 |
2.90 |
3.05 |
3.20 |
0.00 |
1.20 |
1.50 |
2.10 |
|
Pay-out ratio (Adj. earnings) |
55.7% |
52.0% |
57.1% |
55.5% |
67.0% |
0.0% |
62.1% |
48.5% |
51.4% |
|
BALANCE SHEET |
||||||||||
Non-current assets |
|
13,924 |
13,749 |
14,399 |
14,868 |
12,606 |
16,224 |
18,974 |
19,924 |
20,874 |
Goodwill |
1,320 |
1,320 |
2,202 |
2,185 |
2,168 |
800 |
800 |
800 |
800 |
|
Other intangible assets |
3,168 |
3,036 |
2,682 |
2,278 |
2,295 |
4,757 |
7,017 |
7,767 |
8,517 |
|
Property, plant, & equipment |
8,143 |
8,003 |
7,688 |
7,684 |
6,216 |
2,662 |
2,942 |
3,142 |
3,342 |
|
Retirement benefit asset |
1,293 |
1,390 |
1,827 |
2,721 |
1,927 |
4,206 |
4,206 |
4,206 |
4,206 |
|
Other non-current assets |
0 |
0 |
0 |
0 |
0 |
3,799 |
4,009 |
4,009 |
4,009 |
|
Current assets |
|
107,095 |
119,496 |
129,322 |
142,423 |
153,475 |
148,041 |
130,760 |
138,187 |
147,636 |
Inventories |
3,186 |
2,182 |
2,632 |
3,808 |
4,574 |
2,840 |
2,000 |
2,500 |
2,500 |
|
Trade & other receivables |
11,309 |
8,860 |
9,236 |
10,917 |
12,582 |
9,457 |
9,023 |
9,808 |
10,430 |
|
Monies held in trust |
65,728 |
75,219 |
83,018 |
86,992 |
99,251 |
102,693 |
96,131 |
106,196 |
116,078 |
|
Cash & equivalents |
26,333 |
32,735 |
34,236 |
40,311 |
36,868 |
29,632 |
21,776 |
17,852 |
16,798 |
|
Other current assets |
539 |
500 |
200 |
395 |
200 |
3,419 |
1,831 |
1,831 |
1,831 |
|
Current liabilities |
|
(121,545) |
(128,164) |
(133,789) |
(142,604) |
(148,818) |
(140,665) |
(123,547) |
(128,398) |
(133,601) |
Trade & other payables |
(77,688) |
(83,135) |
(87,201) |
(94,592) |
(61,191) |
(57,150) |
(50,167) |
(54,926) |
(59,240) |
|
Tax payable |
(671) |
(262) |
(424) |
0 |
(580) |
0 |
0 |
0 |
0 |
|
Provisions |
(43,186) |
(44,767) |
(46,164) |
(48,012) |
(58,286) |
(53,802) |
(46,644) |
(45,548) |
(45,530) |
|
Non-current liabilities |
|
(2,907) |
(1,881) |
(1,118) |
(662) |
(553) |
(5,253) |
(5,456) |
(5,456) |
(5,456) |
Deferred tax liability |
(273) |
(181) |
(194) |
(662) |
(553) |
(1,121) |
(1,011) |
(1,011) |
(1,011) |
|
Retirement benefit obligation |
(2,634) |
(1,700) |
(924) |
0 |
0 |
0 |
0 |
0 |
0 |
|
Lease liabilities |
(4,132) |
(4,445) |
(4,445) |
(4,445) |
||||||
Net assets |
|
(3,433) |
3,200 |
8,814 |
14,025 |
16,710 |
18,347 |
20,731 |
24,257 |
29,453 |
Minorities |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
Shareholders' equity |
|
(3,433) |
3,200 |
8,814 |
14,025 |
16,710 |
18,347 |
20,731 |
24,257 |
29,453 |
CASH FLOW |
||||||||||
Operating Cash Flow |
14,106 |
12,184 |
9,603 |
10,540 |
6,874 |
6,866 |
(4,287) |
2,668 |
6,134 |
|
Net interest |
1,176 |
1,339 |
1,539 |
1,267 |
1,497 |
1,640 |
263 |
296 |
322 |
|
Tax paid |
(2,132) |
(2,490) |
(2,258) |
(2,537) |
(1,576) |
(2,864) |
(2,184) |
(1,352) |
(1,787) |
|
Capex |
(597) |
(1,126) |
(717) |
(1,020) |
(1,152) |
(5,030) |
(4,619) |
(3,300) |
(3,300) |
|
Acquisitions/disposals |
41 |
52 |
(875) |
1 |
0 |
1 |
3,047 |
0 |
0 |
|
Dividends paid |
(4,198) |
(4,380) |
(5,052) |
(5,370) |
(5,668) |
(5,963) |
0 |
(2,236) |
(2,423) |
|
Other |
0 |
0 |
305 |
0 |
345 |
419 |
(77) |
0 |
0 |
|
Net cash flow |
8,396 |
5,579 |
2,545 |
2,881 |
320 |
(4,931) |
(7,856) |
(3,924) |
(1,054) |
|
Opening net (debt)/cash |
14,842 |
23,238 |
28,817 |
31,362 |
34,243 |
34,563 |
29,632 |
21,776 |
17,852 |
|
Closing net (debt)/cash |
|
23,238 |
28,817 |
31,362 |
34,243 |
34,563 |
29,632 |
21,776 |
17,852 |
16,798 |
Overdraft |
3,095 |
3,918 |
2,874 |
6,068 |
2,305 |
0 |
0 |
0 |
0 |
|
Closing net (debt)/cash as per balance sheet |
|
26,333 |
32,735 |
34,236 |
40,311 |
36,868 |
29,632 |
21,776 |
17,852 |
16,798 |
Source: Appreciate Group, Edison Investment Research
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