Investing for faster growth

Park Group 3 May 2019 Update
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Park Group

Investing for faster growth

Trading update

Financial services

3 May 2019

Price

64p

Market cap

£119m

Net cash (£m) as at 30 September 2018

32.5

Shares in issue

186.3m

Free float

100%

Code

PKG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.7)

(12.9)

(15.2)

Rel (local)

(14.6)

(16.8)

(12.8)

52-week high/low

81.75p

64.00p

Business description

Park Group is a specialised financial services business and is the UK’s leading provider of multi-retailer redemption products to the corporate and consumer markets. Consumers can access these products directly through its market-leading Christmas Savings offering. Corporate customers use these products to supply a range of incentive and reward products, often tailor-made.

Next events

FY19 results

12 June 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Park Group is a research client of Edison Investment Research Limited

In a trading update, management says FY19 trading exceeded its expectations, driven by Corporate business, and it expects similar trends in the current year. Reported profitability in FY19 and FY20 will be negatively affected by costs associated with implementing the strategic business plan, with little of the benefit expected until FY21 and beyond, and also IFRS 15 effects. We expect management to provide more details of the potential for enhanced growth and efficiency with the full-year results.

Year end

Billings*
(£m)

Revenue
(£m)

Adj. PBT**
(£m)

EPS***
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/17

404.5

119.6

11.9

5.1

2.90

12.6

4.5

03/18

412.8

111.1

12.6

5.5

3.05

11.7

4.8

03/19e

420.7

111.2

12.5

4.9

3.20

13.1

5.0

03/20e

445.5

117.5

11.7

5.1

3.35

12.6

5.2

Note: *Billings is a non-statutory measure of sales defined as the face value of voucher sales and the amount of value loaded onto prepaid cards, less any discount given to customers. **PBT is adjusted for exceptional items. ***EPS is fully diluted on a statutory basis.

Investment cost will reduce near-term earnings

Park says the strong trading performance was driven by the Corporate business, with the Consumer business ‘broadly stable’ and growth particularly strong in higher-margin cards. IFRS 15 will defer some of the profitability benefit to future reporting periods and, including higher strategic planning costs, FY19 PBT before an exceptional £1.25m non-cash property write-down related to the head office move will be slightly below market consensus. In FY20 the strategic investment cost will have a net £2.0m impact before the net benefits emerge from FY21. Park has a debt-free balance sheet and cash-generative business model to support this investment phase, and our DPS forecasts are unchanged. Our FY19 PBT forecast (before the FY19 exceptional charge) reduces to £12.5m (was £12.8m) and FY20 to £11.7m (was £14.3m).

Focus, efficiency and growth

The strategic business plan that the new management team presented in December highlights the strong market potential in multi-retailer redemption products, led by card and digital formats, and the strengths of Park’s existing offering. Park will accelerate the investment in digital enablement, the driver of its growth in past 10 years, to capture more of this market potential while increasing efficiency through streamlining and simplification of products and processes. Using that same technological and product capability, Park plans a new product to further penetrate the consumer market, a £2bn+ market opportunity where its current penetration is minimal compared with its dominant position in the Christmas savings market and strong position in the business sector.

Valuation: Attractive yield and medium-term growth

For now we leave our fair value, based on a modified DCF and P/E relative comparison, unchanged at 87p (see page 3 for more details). Near-term earnings will be held back by strategic investment cost, but the goal is faster medium-term growth. Meanwhile, the attractive dividend yield is well covered by earnings.

Further details from the trading update

FY19: More profitable mix, but greater profit deferral

Given the acceleration in higher-margin card billings late in the FY19 year, management estimates the additional profit deferral for the year at c £0.5m. The impacts of IFRS 15 are explained in detail in our post-interim results update and although there is some deferral of income recognition compared with the old accounting standard, there is no impact on cash flow or the profit that is ultimately reported. The re-stated historical financial statements previously provided by the group show an average annual IFRS 15 pre-tax profit deferral over the four years to end-FY18 of c £0.4m, or c 3%.

Reflecting the underlying trading performance, despite the additional profit deferral and an additional c £0.5m of costs relating to investment in the new strategic business plan (c £0.3m in H119), management expects profit before tax and exceptional items will only be marginally below market consensus (revenues of £112m and PBT of £12.9m) for FY19.

Reported FY19 profits will also be affected by an exceptional non-cash impairment charge of c £1.25m. This is related to the group’s previously announced decision to move the majority of its core operations to new offices in Liverpool city centre (fulfilment and redemption activities will remain at the current site, along with separated hamper production) from the existing site at Valley Road, Birkenhead. The move is intended to provide the core activities with access to a wider talent pool, benefiting from an existing hub of like-minded fintech businesses in central Liverpool. Management anticipates the additional premises costs will fairly quickly be mitigated by productivity improvements and that the potential sale or subletting of vacated space in Birkenhead should also accelerate the pay-back period. The lease has been signed and the move is expected to take place in late summer 2019.

FY20 will see a step up in strategic investment cost

Park anticipates the trends experienced in the FY19 year that ended 31 March will continue in FY20, with good growth in the Corporate business, partially offset in the Consumer business by a slower Christmas savings market. In the latter, Park began taking customer orders late in 2018 for Christmas 2019, and will by now have a reasonable sense of Christmas savings activity for the year. As well as a challenging retail environment, the slowdown highlights some of the more structural issues that the strategic business plan aims to address. Strategic investment cost (net of the initial benefits) is expected to be c £2.0m in FY20, which will result in lower profitability in the current year but this is expected to increase growth and earnings thereafter. The FY20 investment costs include the impact of running two sites as the group transitions the core activities to the new offices, as well as additional technology and marketing investment.

Progress with the strategic plan

Park reports good progress through the initial steps of the strategic business plan, which aims to enhance how the group works with consumers, businesses and retailers, and will give more details with the FY19 full-year results announcement in June.

Continuing senior hires include a new chief transformation officer, a human resources director and an interim head of marketing. Towards the goal of becoming an organisation anchored on digital products and processes, a new enterprise resource planning system has been selected and is expected to provide scalability, resilience and efficiency.

Leadership continuity

We welcome the announcement that the non-executive chairman, Laura Carstensen, has agreed to continue in her role for another three years from June 2019. She has significant experience of the group, having been appointed to the board as a non-executive director in September 2013 and becoming non-executive chairman in June 2016. As chairman she has helped steer the group through a period of significant management renewal and change, including the appointment of Ian O’Doherty as CEO in January 2018, Tim Clancy as CFO in August 2018 and a number of other senior executives. The new management team set out its strategic plans for the group in December 2018.

Financials

Taking account of management guidance in the trading statement, we have slightly reduced our forecasts for FY19 PBT and revenues before the exceptional write-down by c 3%, to £12.5m (from £12.8m) and £111.2m (from £114.3m), respectively. The revenue reduction substantially relates to the product mix changes discussed above rather than customer activity or billings. The small reduction in forecast billings (less than 1%) reflects a revised assumption of flat billings in the Consumer business rather than slight growth.

Our revised FY20 forecast captures the negative impact of the additional costs related to implementing the strategic business plan but little to none of the benefits expected by management on a medium-term basis. To better reflect this, we will extend our forecasting period with the annual results in June.

Exhibit 1: Forecast revisions

Billings (£m)

Revenues (£m)

Adjusted PBT* (£m)

Diluted EPS (p)

DPS (p)

New

Old

Change

New

Old

Change

New

Old

Change

New

Old

Change

New

Old

Change

03/19e

420.7

422.3

-0.4%

111.2

114.3

-2.7%

12.5

12.8

-2.6%

4.9

5.6

-12.3%

3.20

3.20

0.0%

03/20e

445.5

449.5

-0.9%

117.5

119.5

-1.7%

11.7

14.3

-18.1%

5.1

6.2

-18.2%

3.35

3.35

0.0%

Source: Edison Investment Research. Note: *PBT adjusted for FY19 exceptional items.

We have made no changes to our forecast DPS growth, with a good level of dividend cover maintained despite the reduction in forecast EPS.

Valuation

Our approach to valuing Park is to consider a potential absolute valuation, based on a modified DCF analysis, alongside a relative value based on a comparison with a selected group of listed stocks that are engaged in activities that provide some overlap with Park. We would not go so far as to call this a peer group comparison because no such listed group exists. Park’s competitor employee benefits and service providers are either private companies or relatively small parts of larger groups, complicating any attempt at a relative valuation approach. Our last published fair value, based on the simple average of these two measures points, was 87p per share.

Our modified DCF valuation has been based on fairly consistent assumptions for an extended period. It is a modified DCF in the sense that we include the interest earned by Park on segregated customer cash balances (but not on the group cash balance), as this is an integral part of the returns the company generates. The customer cash is excluded from the overall valuation and the voucher provisions balance as this will eventually flow out in settlement of vouchers that have been issued but not yet redeemed. Beyond the forecast period (currently up to end-FY20) we have grown free cash flow at 5% per year until year 10, enhanced by an assumed normalisation of interest rates to 3% from FY21. The terminal cash flow has valued at 10x and we have applied a discount rate of 10%. Given the impact of the strategic investment costs on our FY20 forecast, an unchanged DCF assumption set would see the DCF value per share reduce from 90p to 77p, but this would not capture any of the accelerated medium-term growth that management is targeting. By assuming two stages of growth, at 10% per year for four years after the forecast period, before reverting to 5%, the DCF value would again be 90p. We will review the DCF value when extending our forecast period after the full-year results in June.

Our relative value comparison recognises the lack of direct comparators to Park. In incentive and rewards products, Sodexo and Edenred are both much larger and more international than Park, and the overlap with Sodexo is limited; Sodexo Benefits and Rewards Services is only a minor part of Sodexo Group. We therefore extend the comparator group to include payments service providers and companies engaged in UK home collected credit services (HCC), directed at a customer group with some demographic/socioeconomic overlap between the traditional customer bases of Park’s Christmas prepayments business (c 50% of Park). We recognise that the read-across is somewhat limited and note the difference between the savings nature of Park’s Christmas prepayments business and the lending nature of HCC. Given Park has no credit risk and we believe it has less regulatory risk, we would expect a higher valuation.

In our last-published fair value of 87p, we made the judgement that c 14x calendar year 2019 earnings would represent a reasonable valuation objective. Given the drag of strategic investment cost on our FY19 forecast earnings, the same 14x multiple would imply a value of 70p, but this would take no account of the benefits that management targets from the investment. We believe a successful implementation of management’s plans, leading to faster growth, increasing scale and a greater focus on digital payments services, has the potential to lift both earnings and valuation over time. On this basis, the 17.4x CY19e multiple implied by our last published fair value of 87p does not appear unreasonable, and we will review this with the full year results.

Exhibit 2: Listed comparator data

Share price (local)

Market cap
(£m)

P/E (x)
CY 1

P/E (x)
CY 2

EV/EBITDA
(x) CY 1

EV/EBITDA
(x) CY 2

Yield
(%)

Incentive

Edenred

41.4

8,507

30.6

27.2

16.5

15.0

2.08

Sodexo

102.2

12,942

19.1

17.6

11.4

10.7

2.69

Incentive average

24.9

22.4

14.0

12.8

2.38

Payment services

Euronet Worldwide

148.2

5,904

21.2

18.2

11.8

10.2

Wirecard

130.2

13,812

31.2

23.2

19.1

14.5

0.15

Payment services average

26.2

20.7

15.4

12.4

0.15

Home collected credit/consumer finance

Morses Club

165.0

214

11.1

10.0

8.1

7.2

4.24

Non-standard Finance

52.4

164

7.8

5.3

8.1

6.5

4.96

Provident Financial

512.4

1,300

10.0

8.0

13.9

1.95

HCC/consumer finance average

9.6

7.8

8.1

9.2

3.72

Whole group average

18.7

15.6

12.5

11.1

2.68

Park Group

64.0

119

12.7

N/A

7.4

N/A

5.00

Source: Refinitiv. Note: Prices at 3 May 2019. Edison estimates for Park Group. Earnings data on a calendar year (CY) basis.

Exhibit 3: Financial summary

Year end 31 March

£000s

2015

2016

2017

2018

2019e

2020e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Re-stated

Re-stated

Re-stated

Re-stated

Consumer billings

196,796

208,352

216,771

224,542

224,542

233,421

Corporate billings

176,091

176,679

187,741

188,244

196,136

212,102

Total Billings

 

372,887

385,031

404,512

412,786

420,678

445,522

Revenue

 

85,769

100,556

119,637

111,054

111,213

117,503

Cost of sales

(59,193)

(72,030)

(89,944)

(79,628)

(79,478)

(83,680)

Gross profit

26,576

28,526

29,693

31,426

31,735

33,822

Gross margin as % billings

7.1%

7.4%

7.3%

7.6%

7.5%

7.6%

Distribution costs

(2,761)

(2,909)

(2,940)

(3,002)

(2,734)

(3,119)

Administrative expenses

(14,914)

(15,176)

(16,348)

(15,702)

(16,572)

(19,135)

EBITDA

 

8,901

10,441

10,405

12,722

12,428

11,569

Depreciation & amortisation

0

0

0

(1,405)

(1,428)

(1,365)

Operating profit before exceptional items

 

8,901

10,441

10,405

11,317

11,000

10,204

Exceptional items

0

0

0

0

(1,250)

0

Operating profit

 

8,901

10,441

10,405

11,317

9,750

10,204

Net Interest

1,245

1,457

1,470

1,270

1,507

1,523

Profit Before Tax & exceptional items

 

10,146

11,898

11,875

12,587

12,507

11,727

Profit before tax

 

10,146

11,898

11,875

12,587

11,257

11,727

Tax

(2,284)

(2,177)

(2,361)

(2,398)

(2,139)

(2,228)

Profit after tax (IFRS)

 

7,862

9,721

9,514

10,189

9,118

9,499

Average number of shares (m)

182.5

183.7

183.9

185.3

185.9

186.3

Fully diluted average number of shares (m)

184.7

187.2

187.2

185.9

187.0

187.3

Basic EPS - IFRS (p)

 

4.3

5.3

5.2

5.5

4.9

5.1

Fully diluted EPS - IFRS (p)

 

4.3

5.2

5.1

5.5

4.9

5.1

Dividend per share (p)

2.40

2.75

2.90

3.05

3.20

3.35

Pay-out ratio

55.7%

52.0%

56.1%

55.4%

65.3%

65.7%

BALANCE SHEET

Non-current assets

 

13,932

13,749

14,399

14,868

13,821

13,821

Goodwill

1,320

1,320

2,202

2,185

2,185

2,185

Other intangible assets

3,168

3,036

2,682

2,278

2,158

2,158

Property, plant, & equipment

8,143

8,003

7,688

7,684

6,357

6,357

Retirement benefit asset

1,293

1,390

1,827

2,721

3,121

3,121

Other non-current assets

8

0

0

0

0

0

Current assets

 

107,095

119,496

129,322

142,423

141,781

152,278

Inventories

3,186

2,182

2,632

3,808

3,862

4,091

Trade & other receivables

11,309

8,860

9,236

10,917

10,517

11,138

Monies held in trust

65,728

75,219

83,018

86,992

90,044

96,519

Cash & equivalents

26,333

32,735

34,236

40,311

36,086

39,259

Other current assets

539

500

200

395

1,271

1,271

Current liabilities

 

(121,545)

(128,164)

(133,789)

(142,604)

(136,017)

(142,722)

Trade & other payables

(77,688)

(83,135)

(87,201)

(94,592)

(89,590)

(94,698)

Tax payable

(671)

(262)

(424)

0

0

0

Provisions

(43,186)

(44,767)

(46,164)

(48,012)

(46,428)

(48,023)

Non-current liabilities

 

(2,907)

(1,881)

(1,118)

(662)

(662)

(662)

Deferred tax liability

(273)

(181)

(194)

(662)

(662)

(662)

Retirement benefit obligation

(2,634)

(1,700)

(924)

0

0

0

Net assets

 

(3,425)

3,200

8,814

14,025

18,923

22,715

Minorities

0

0

0

0

0

0

Shareholders' equity

 

(3,425)

3,200

8,814

14,025

18,923

22,715

CASH FLOW

Operating Cash Flow

14,106

12,184

9,903

10,540

10,196

11,194

Net interest

1,176

1,339

1,539

1,267

1,298

1,523

Tax paid

(2,132)

(2,490)

(2,258)

(2,537)

(3,215)

(2,228)

Capex

(597)

(1,126)

(717)

(1,020)

(1,167)

(1,260)

Acquisitions/disposals

41

52

(875)

1

0

0

Dividends paid

(4,198)

(4,380)

(5,052)

(5,370)

(5,759)

(6,056)

Other

0

0

5

0

490

0

Net cash flow

8,396

5,579

2,545

2,881

1,843

3,173

Opening net (debt)/cash

14,842

23,238

28,817

31,362

34,243

36,086

Closing net (debt)/cash

 

23,238

28,817

31,362

34,243

36,086

39,259

Overdraft

3,095

3,918

2,874

6,068

0

0

Closing net (debt)/cash as per balance sheet

 

26,333

32,735

34,236

40,311

36,086

39,259

Source: Park Group, Edison Investment Research

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