Park Group — Billings deferred but implied margin positive

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Research: Financials

Park Group — Billings deferred but implied margin positive

Park recently issued a trading update ahead of publishing results on 12 June for the year to 31 March 2018. Due to a later start for a significant corporate order FY18 billings are lower than expected, although the contract is now underway. Given the scale of the billings impact, Park’s guidance that results will only be marginally below market expectations implies that trading margins are stronger than we had forecast, which would continue a multi-year trend that has been driven by product innovations and digital efficiencies.

Martyn King

Written by

Martyn King

Director, Financials

Financials

Park Group

Billings deferred but implied margin positive

Estimate revision

Financial services

21 May 2018

Price

79.25p

Market cap

£147m

Net cash (£m) at 30 September 2017 (excludes £194.2m of cash held in trust in respect of customer liabilities)

5.4

Shares in issue

185.6m

Free float

98.2%

Code

PKG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.6)

(6.8)

(5.5)

Rel (local)

(7.1)

(12.5)

(10.1)

52-week high/low

90.0p

75.0p

Business description

Park Group is a specialised financial services business and is one of the UK’s leading multi-retailer voucher and prepaid gift card businesses, focused on the corporate gift and Christmas savings markets. Sales are generated through the internet, a direct sales force and agents.

Next events

Preliminary results

12 June 2018

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

Park recently issued a trading update ahead of publishing results on 12 June for the year to 31 March 2018. Due to a later start for a significant corporate order FY18 billings are lower than expected, although the contract is now underway. Given the scale of the billings impact, Park’s guidance that results will only be marginally below market expectations implies that trading margins are stronger than we had forecast, which would continue a multi-year trend that has been driven by product innovations and digital efficiencies.

Year end

Billings*
(£m)

PBT**
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/16

385.0

11.9

5.2

2.75

15.3

3.5

03/17

404.5

12.4

5.3

2.90

15.0

3.7

03/18e

412.7

12.8

5.5

3.05

14.5

3.8

03/19e

438.6

13.6

5.8

3.20

13.7

4.0

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 and EPS (fully diluted) are on a statutory basis.

Changes to estimates ahead of results

FY18 results will be affected by the delayed start to the contract and some additional costs related to the ongoing senior management changes. Ahead of the full details, we have interpreted “marginally below market expectations” as a 2% reduction in FY18 PBT, which implies an increase in gross margin. This most likely reflects a continuation of the H118 product sales mix trend (more flexecash product and fewer third-party vouchers) that is margin positive. For FY19, more cautious billings growth assumptions flow through to a 5% reduction in forecast PBT. Our forecast DPS growth is unchanged and the dividend remains well covered while the cash position remains strong.

New initiatives gaining traction

Constant innovation has supported growth in the Consumer business, substantially Christmas savings, and the Corporate business, which is based around incentive and rewards services. The target market is large (£5.6bn a year as defined by the UK Giftcard & Voucher Association), providing ample potential for further growth. The trading update confirms progress with the roll-out of Evolve, a live online platform providing organisations with a quick, easy and reliable way to reward employees or customers with digital rewards codes via email or SMS, and Love2shop Worldwide, its worldwide equivalent. Around two-thirds of Christmas savings transactions are already made using a mobile device and Park’s recently introduced mobile app makes the process faster, easier and more convenient, targeting a broader customer base and increased order levels.

Valuation: Reducing fair value in line with earnings

We have reduced our fair value in line with the FY19e earnings changes, from 88p to 84p.

Billings deferred but positive margin

The short trading update covers the financial year ended 31 March 2018 (FY18), with preliminary results due to be published on 12 June 2018. Park says it expects continued growth, with results ahead of last year but marginally below market expectations.

The main reason provided for the slight shortfall is a delay in the roll-out of a significant contact with a client in the Corporate business. Although it is now underway, the impact on billings and revenues will not begin until FY19. As a result of the delay, management indicates that FY18 Corporate billings remained relatively flat in FY18 despite seeing increased traction in the value loaded onto flexecash products, and continuing customer uptake of the Evolve platform and Love2shop Worldwide. The number of corporate clients using the Evolve platform in the UK had reached 269 by end FY18, compared with 165 a year earlier and 249 at the time of the interim report in November 2017. Love2shop Worldwide, launched in May 2017, now has 48 international organisations using the platform, up from 31 in November.

In the Consumer business, completed orders were almost 4% ahead of the year before, while downloads of the Park savings app continue to grow, reaching more than 170,000.

In addition to the Corporate business billings delay, Park has experienced some additional costs as a result of the recent changes in senior management. New chief executive officer, Ian O’Doherty, took over in February, replacing Chris Houghton who retired from the group after more than 30 years of service, and who had held the position of CEO since 2012. Mr O’Doherty brings significant banking and payment and card services experience, highly relevant for Park’s continuing expansion. A successor for group finance director, Martin Stewart, has also been appointed. Mr Stewart announced his intention to leave the company last December after 13 years of service, and will be replaced by Tim Clancy, who will join the board Park and its board in August. Mr Stewart will remain with the company until an orderly handover is completed. Mr Clancy joins Park from Assurant Europe, the European subsidiary of Assurant Inc., the US-listed global insurance provider, where he has been chief financial officer since February 2013. Before that he was commercial finance director of Shop Direct Group, owner of the consumer brands Littlewoods and Very, which have transitioned to on-line retail from traditional mail order and high street distribution. Completing the change in the executive team that has managed the transformation of the group over the past 10-15 years, it was also announced at the end of March 2018 that Gary Woods, managing director of Park Retail Group, would step down from the board after 38 years of service, passing on his executive duties internally.

Billings delayed but margins higher than we forecast

The fact that Park is now guiding to profits being only marginally below previous market expectations, despite a fairly substantial deferment of billings, suggests that trading margins are running ahead of the level that we had forecast. We see little room for positive surprise from interest earnings to provide the off-set to billings weakness; the strong cash profile for the year is known with some degree of certainty (peaking in November at a record £229m as reported with the interim results) while interest earnings are yet to benefit from the rise in interest rates at the very short end of the yield curve. Meanwhile, administrative costs are subject to some upwards pressure as note above.

Ahead of the release of full-year results on 12 June, we have made preliminary adjustments to our estimates. The FY18 billings reduction is focused on Corporate and we have provisionally interpreted the comment of earnings growth being “marginally below market expectations” as a 2% reduction from our previous estimate (representing growth of c 4% on FY17). Our forecast for the FY18 gross margin on billings increases to 7.7% from 7.5% in FY17, continuing the improving trend of recent years (FY16: 7.4%), and above the 7.4% that we previously forecast, which had cautiously allowed for the possibility of some competitive margin erosion. A full explanation of the drivers awaits the full-year results, although we note that the product sales mix trends of H118 (more flexecash driven product and fewer third-party vouchers) were margin positive.

The FY18 billings delay has a knock-on effect on our FY19 estimate and we have also taken a more cautious approach to the underlying growth rate of billings. Our FY19 PBT estimate is lowered by 5%.

The trading statement makes clear that the overall financial position of the group remains solid, with cash balances and order books again ahead of their positions at the same time last year. On this basis, our DPS forecasts remain the same, with dividends remaining well covered by earnings.

Exhibit 1: Provisional estimate revisions

Billings (£m)

Revenues (£m)

IFRS PBT (£m)

Reported EPS (p)

DPS (p)

 

New

Old

Change

New

Old

Change

New

Old

Change

New

Old

Change

New

Old

Change

03/18e

412.7

432.3

-5%

298.5

317.4

-6%

12.8

13.2

-2%

5.47

5.61

-2%

3.05

3.05

0%

03/19e

438.6

462.9

-5%

301.3

324.8

-7%

13.6

14.3

-5%

5.77

6.08

-5%

3.20

3.20

0%

Source: Edison Investment Research

Exhibit 2: Financial summary

Year end 31 March

£'000s

2015

2016

2017

2018e

2019e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

Billings

 

 

372,887

385,031

404,512

412,660

438,586

Revenue

293,329

302,545

310,927

298,538

301,301

Cost of sales

(265,966)

(274,060)

(280,758)

(266,920)

(267,593)

Gross margin

27,363

28,485

30,169

31,618

33,707

Distribution costs

(2,761)

(2,909)

(2,940)

(2,836)

(2,862)

Administrative expenses

(13,057)

(13,150)

(14,274)

(15,661)

(17,074)

EBITDA

 

 

11,545

12,426

12,955

13,121

13,771

Depreciation & amortisation

(1,308)

(1,309)

(1,358)

(1,258)

(1,216)

Amortisation of acquired intangible, goodwill impairment, & impairment of investment property

(314)

(86)

(47)

(47)

(47)

Share-based payments

(235)

(631)

(669)

(350)

(350)

Exceptional operating income

0

0

0

0

0

Operating profit

9,688

10,400

10,881

11,466

12,158

Operating Profit (before amort. and except.)

 

10,237

11,117

11,597

11,863

12,555

Net Interest

1,245

1,457

1,470

1,363

1,396

Profit Before Tax (norm)

 

 

11,482

12,574

13,067

13,225

13,951

Profit before tax (IFRS)

 

 

10,933

11,857

12,351

12,828

13,554

Tax

(2,434)

(2,169)

(2,452)

(2,566)

(2,711)

Profit after tax (norm)

 

 

8,926

10,274

10,473

10,580

11,161

Profit after tax (IFRS)

 

 

8,499

9,688

9,899

10,263

10,843

Discontinued operations

0

0

0

0

0

Profit after tax (IFRS)

 

 

8,499

9,688

9,899

10,263

10,843

Average Number of Shares Outstanding (fully diluted,m)

184.7

187.2

187.2

187.6

187.9

Basic EPS - IFRS (p)

 

 

4.66

5.28

5.38

5.54

5.84

Fully diluted EPS - IFRS (p)

 

 

4.60

5.18

5.29

5.47

5.77

EPS - normalised fully diluted (p)

 

 

4.83

5.49

5.59

5.64

5.94

Dividend per share (p)

2.40

2.75

2.90

3.05

3.20

Gross margin on billings (%)

7.3

7.4

7.5

7.7

7.7

EBITDA margin as % of billings

3.1

3.2

3.2

3.2

3.1

Operating margin (before GW and except) as % billings

2.7

2.9

2.9

2.9

2.9

BALANCE SHEET

Fixed assets

 

 

13,932

13,749

14,399

14,139

13,930

Intangible assets

4,488

4,356

4,884

4,680

4,518

Tangible assets

8,143

8,003

7,688

7,632

7,586

Retirement benefit obligation

1,293

1,390

1,827

1,827

1,827

Other

8

0

0

0

0

Current assets

 

 

106,998

119,365

129,182

132,289

147,606

Debtors

14,937

11,411

11,928

12,159

12,923

Cash held in trust

65,728

75,219

83,018

87,453

95,742

Cash available to group

26,333

32,735

34,236

32,677

38,941

Current liabilities

 

 

(118,190)

(124,808)

(130,038)

(128,520)

(138,769)

Creditors

(75,004)

(80,041)

(83,874)

(81,656)

(87,778)

Provisions

(43,186)

(44,767)

(46,164)

(46,864)

(50,992)

Short-term borrowings

0

0

0

0

0

Long-term liabilities

 

 

(2,907)

(1,881)

(1,118)

(435)

249

Long-term borrowings

0

0

0

0

0

Deferred tax

(273)

(181)

(194)

(194)

(194)

Retirement benefit obligation

(2,634)

(1,700)

(924)

(241)

443

Net assets

 

 

(167)

6,425

12,425

17,473

23,016

Minorities

0

0

0

0

0

Shareholders' equity

 

 

(167)

6,425

12,425

17,473

23,016

CASH FLOW

Operating Cash Flow

14,106

12,184

9,903

8,902

11,410

Net interest

1,176

1,339

1,539

1,363

1,396

Tax

(2,132)

(2,490)

(2,258)

(2,566)

(2,711)

Capex

(597)

(1,126)

(717)

(1,045)

(1,055)

Acquisitions/disposals

41

52

(875)

1

0

Financing

0

0

5

0

0

Dividends

(4,198)

(4,380)

(5,052)

(5,340)

(5,650)

Other

0

(3)

0

0

0

Net cash flow

8,396

5,576

2,545

1,314

3,390

Opening net (debt)/cash

14,844

23,241

28,817

31,362

32,677

Closing net (debt)/cash

 

 

23,241

28,817

31,362

32,677

36,067

Source: Company data, Edison Investment Research

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Park Group 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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 4, 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 4, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Park Group 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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