Findel |
Peak period starts strongly |
Trading update |
Retail |
17 October 2018 |
Share price performance
Business description
Analysts
Findel is a research client of Edison Investment Research Limited |
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Findel’s pre-Christmas peak period has started strongly over recent weeks. Management retains its guidance for the full-year results and we retain our forecast of c 6% earnings growth. Past negatives, which have complicated the investment case, continue to be resolved: turnaround is on course at the smaller Education division, financial services redress is in the final stages and the balance sheet has strengthened further. We see no reason to change our valuation of 428p, which is c 60% above the current share price.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
P/E |
EV/EBITDA (x) |
03/17 |
457.0 |
40.8 |
22.2 |
20.4 |
13.2 |
7.7 |
03/18 |
479.0 |
46.6 |
26.8 |
25.9 |
10.4 |
6.7 |
03/19e |
508.8 |
52.1 |
28.5 |
27.5 |
9.8 |
6.0 |
03/20e |
538.6 |
55.7 |
30.9 |
29.8 |
9.1 |
5.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Peak trading period starts strongly at Express
Express Gifts, trading as Studio, grew its revenue by 8% for the first 28 weeks to 12 October, which would be the envy of many terrestrial retailers. Express sells 70% of its goods online with the other 30% remaining in the catalogue model. Revenue growth was lower than the c 11% for the first 16 weeks of the financial year, depressed by the weak months of August and September. However, the start of the autumn marketing campaign that leads into its peak months has seen customers responding much more strongly, giving us confidence in our 8.5% growth forecast for the year.
Success continues for Education turnaround plan
Findel’s Online Value strategy is working emphatically with ordering through its platform increasing from c 20% at its start in September 2017 to over 55% now. Despite the continuing very tough trading environment, growth in the core UK customer base of 4% over the last year is evidence of an increasing market share.
Balance sheet improvement
Core net debt at the end of September 2018 was £81m, about £9m lower than the same date last year. Findel is steadily bringing this figure down – at March 2018 it decreased y-o-y by £7m to £73.8m. We are not changing our balance sheet forecast, but the indication is positive. Also, the run-off of the £8.6m March 2018 provision representing the tail end of earlier years’ recognition of financial redress is proceeding to plan and is in the final stages.
Valuation: We retain our 428p per share
We make no change to our forecast, projecting c 6% pre-tax and EPS growth for the full year. Accordingly, we retain our valuation of 428p per share, reflecting a blend of DCF and peer comparison metrics.
Trading statement at 28 weeks
Findel has reported trading results for a slightly longer period than the first half to provide comparability. The phasing of the pre-Christmas marketing campaign was adjusted across the end of September and start of October 2017, so it did not conflict with the introduction of the Financier credit platform in early October 2017. This year's campaign has returned to normalised patterns, so the trading statement refers to a 28-week period to 12 October to remove this distortion.
Revenue growth at Express in line with expectations
Revenue has grown 8% for the first 28 weeks of the year. This is lower than the c 11% for the first 16 weeks reported in June, as August and September were slow months throughout retailing. However, we understand that sales in recent weeks are strongly ahead, and we therefore remain confident in our 8.5% growth forecast for the full year.
Findel Education progresses in line with plans
Progress at Findel Education remains in line with management’s plans, which are based on a drive to increase online ordering through its integrated platform, using product sourced in the Far East. Online ordering has increased from c 20% at the start of the Online Value strategy in September 2017 to over 55% now. This is a significant improvement in the face of a continuing tough trading environment. Growth in the core UK customer base of 4% over the last year is evidence of increasing market share.
Reduced core net debt
Core net debt at the end of September 2018 was £81m about £9m lower than the same date last year. We do not regard that as significant in the context of the major pre-Christmas trading period lying ahead, and we make no change to our balance sheet forecast for the year. However, it is perhaps a promising indication in the context of consistent core net debt reductions over the last seven years.
Legacy settlements as provisioned
Findel is in the final stages of settling with customers in respect of mis-selling and poor value in financial insurance products from past periods as far back as 2005. The company has confirmed that the run-off is consistent with the existing provision, which was £8.6m at March 2018. This is in contrast to peer N Brown, which in its recent interim results increased its comparable provisions by £22.4m to a total of £33.0m. Similarly, Shop Direct provided £128.0m in its accounts for the year to June 2018, and had a total provision at year end of £100.4m.
No change to forecasts or valuation
We retain our forecasts, which are for pre-tax profit growth of 6.4% and EPS growth of 6.2% for the year to March 2019. That being the case, we see no necessity to revisit our valuation of 428p per share, which we established in our note Outstanding success with online-led strategy published on 8 June 2018. The valuation is a blend of a DCF valuation of 401p and a peer comparison indicating 455p.
Exhibit 1: Financial summary
£'000s |
2017* |
2018 |
2019e |
2020e |
||
Mar |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
457,030 |
478,959 |
508,789 |
538,585 |
Cost of Sales |
(269,182) |
(281,176) |
(295,870) |
(313,548) |
||
Gross Profit |
187,848 |
197,783 |
212,919 |
225,037 |
||
EBITDA |
|
|
40,786 |
46,569 |
52,061 |
55,722 |
Operating Profit (before amort. and except.) |
|
33,300 |
38,146 |
43,308 |
46,741 |
|
Intangible Amortisation |
(1,959) |
(1,996) |
(2,416) |
(2,383) |
||
Operating profit pre exc post intang amortisation |
31,341 |
36,150 |
40,891 |
44,358 |
||
Exceptionals |
(82,152) |
0 |
0 |
0 |
||
Other/share based payments |
(191) |
(199) |
(1,000) |
(1,000) |
||
Operating Profit |
(51,002) |
35,951 |
39,891 |
43,358 |
||
Net Interest |
(8,920) |
(9,130) |
(11,345) |
(12,424) |
||
Derviatives, other |
556 |
(4,701) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
22,230 |
26,821 |
28,546 |
30,935 |
Profit Before Tax (FRS 3) |
|
|
(59,366) |
22,120 |
28,546 |
30,935 |
Tax |
1,659 |
2,081 |
(5,766) |
(6,249) |
||
Profit After Tax (norm) |
17,617 |
22,397 |
23,780 |
25,686 |
||
Profit After Tax (FRS 3) |
(57,707) |
24,201 |
22,780 |
24,686 |
||
Average Number of Shares Outstanding (m) |
86.3 |
86.3 |
86.3 |
86.3 |
||
EPS - normalised (p) |
|
|
20.4 |
25.9 |
27.5 |
29.8 |
EPS - normalised and fully diluted (p) |
|
20.4 |
25.9 |
27.5 |
29.8 |
|
EPS - (IFRS) (p) |
|
|
(66.8) |
28.0 |
26.4 |
28.6 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
41.1 |
41.3 |
41.8 |
41.8 |
||
EBITDA Margin (%) |
8.9 |
9.7 |
10.2 |
10.3 |
||
Operating Margin (before GW and except.) (%) |
7.3 |
8.0 |
8.5 |
8.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
79,012 |
77,019 |
81,987 |
82,623 |
Intangible Assets |
26,185 |
25,174 |
28,895 |
28,512 |
||
Tangible Assets |
44,417 |
47,596 |
48,843 |
49,862 |
||
Investments |
8,410 |
4,249 |
4,249 |
4,249 |
||
Current Assets |
|
|
301,265 |
312,458 |
340,659 |
366,127 |
Stocks |
57,108 |
53,091 |
56,941 |
69,026 |
||
Debtors |
212,648 |
232,666 |
246,788 |
259,097 |
||
Cash |
29,173 |
26,244 |
36,480 |
37,553 |
||
Other |
2,336 |
457 |
451 |
451 |
||
Current Liabilities |
|
|
(91,789) |
(81,190) |
(91,216) |
(92,402) |
Creditors |
(91,244) |
(80,618) |
(90,698) |
(91,884) |
||
Short term borrowings |
(545) |
(572) |
(518) |
(518) |
||
Long Term Liabilities |
|
|
(271,785) |
(268,606) |
(272,215) |
(272,637) |
Long term borrowings |
(253,603) |
(258,001) |
(264,192) |
(264,192) |
||
Other long term liabilities |
(18,182) |
(10,605) |
(8,023) |
(8,445) |
||
Net Assets |
|
|
16,703 |
39,681 |
59,215 |
83,711 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
12,281 |
11,439 |
33,210 |
31,746 |
Net Interest |
(9,103) |
(8,365) |
(11,345) |
(12,424) |
||
Tax |
148 |
581 |
(5,766) |
(6,249) |
||
Capex |
(11,724) |
(10,595) |
(12,000) |
(12,000) |
||
Acquisitions/disposals |
1,168 |
(450) |
0 |
0 |
||
Financing |
0 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(7,230) |
(7,390) |
4,099 |
1,073 |
||
Opening net debt/(cash) |
|
|
216,682 |
224,974 |
232,329 |
228,230 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(1,062) |
35 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
224,974 |
232,329 |
228,230 |
227,157 |
Source: Findel, Edison Investment Research. Note:* 53 weeks. Restated.
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