Multiples compared against online peers
G4M is valued on P/E and EV/EBITDA multiples that are close to those of Boohoo and ASOS, which are at the upper end of the range of pure-play online retailers:
Exhibit 2: Comparable valuation multiples for pure-play retailers
Name |
Year end |
Market cap (£m) |
Year 1
P/E (x) |
Year 2
P/E (x) |
Year 1 EV/
EBITDA (x) |
Year 2 EV/
EBITDA (x) |
Year 1 EV/
Sales (x) |
Year 2 EV/
Sales (x) |
Boohoo |
02/2017 |
2,577 |
77.8 |
62.6 |
50.9 |
36.6 |
5.3 |
4.0 |
Gear4music |
02/2017 |
161 |
81.8 |
61.3 |
42.9 |
31.6 |
2.0 |
1.6 |
ASOS |
08/2016 |
4,725 |
57.4 |
44.8 |
26.8 |
21.1 |
1.9 |
1.5 |
Zalando |
12/2016 |
9,130 |
43.6 |
33.9 |
21.2 |
16.7 |
1.5 |
1.3 |
Yoox Net-A-Porter |
12/2016 |
3,076 |
37.4 |
27.4 |
14.4 |
11.0 |
1.3 |
1.1 |
AO World |
03/2017 |
570 |
N/A |
N/A |
N/A |
43.7 |
0.7 |
0.6 |
Koovs |
03/2016 |
67 |
N/A |
N/A |
N/A |
0.0 |
2.3 |
0.9 |
Average (excl G4M) |
|
|
54.0 |
42.2 |
28.3 |
21.5 |
2.2 |
1.6 |
Source: Bloomberg, Edison Investment Research. Note: Calendarised to February year end.
The market is clearly focusing on the European opportunity, which implies continued outperformance if G4M wins market share in the same way as in the UK. That is consistent with G4M’s strategy of investing in the European market opportunity, not only through the local distribution hubs that have already been opened in Sweden and Germany, but also in terms of investment in the country websites, Europe-wide marketing and the functional support for a much bigger marketing and distribution operation.
European market share profile
We have little doubt that G4M can grow its European market share, currently 1%, in the same way as it has done in the UK, where in FY12 it too had only 1% of the market. The question is how long this will take. In the UK it will have taken six years, until the current year FY18, to grow UK market share from 1% to 6% (ie our FY18 forecast of £43.6m UK revenue against the UK market of £790m).
While UK revenue is now showing a pattern of substantial growth (34% in FY17 and 27% in FY18e), initial growth in Europe is much more dramatic (125% in FY17: we forecast 70% in FY18). However, that is in the context of a European market that is around five times the size of the UK market, according to management’s market estimates.
Exhibit 3: UK vs international revenue
|
|
|
|
Share price implies slower market share growth in Europe
We have adapted our DCF valuation model to mirror assumptions on European share growth that give best fit with the current share price. We use our existing DCF assumptions (10-year period, weighted cost of capital of 8.7%, terminal growth 2%, terminal EBITDA margin 10%). Above 6% market share, we fade growth towards our 2% terminal assumption, for both the UK and Europe.
Exhibit 4: UK market share history
|
Exhibit 5: Mainland Europe market share assumption
|
|
|
|
|
|
Exhibit 4: UK market share history
|
|
|
|
Exhibit 5: Mainland Europe market share assumption
|
|
|
|
While the UK takes six years (including our current year forecast) to achieve market share of 6%, the current share price implies that mainland Europe takes eight years to reach the same level, in FY26. It may be a reasonable assumption that it takes this longer time, because of the scale of the market and because of the scale of online competition in Europe.
However, if European market share were to reach 6% in six years (ie by FY24), that would be equivalent to a share price valuation of 962p. This scenario is a plausible upside case given the strategic focus of G4M’s investment and resources.
In a ‘blue sky’ case in which European market share reaches 6% one year earlier (ie by FY23), our valuation would be 1,215p.
Exhibit 6: Financial summary
|
|
£000 |
2016 |
2017 |
2018e |
2019e |
2020e |
Year end: February |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
INCOME STATEMENT |
|
|
|
|
|
|
|
Revenue |
|
|
35,489 |
56,128 |
79,728 |
102,116 |
127,347 |
Cost of Sales |
|
|
(26,303) |
(40,983) |
(58,615) |
(74,875) |
(93,382) |
Gross Profit |
|
|
9,186 |
15,145 |
21,114 |
27,242 |
33,965 |
EBITDA |
|
|
1,688 |
3,650 |
4,092 |
5,133 |
6,649 |
Operating profit (before amort. and except). |
|
903 |
2,655 |
2,648 |
3,590 |
4,747 |
Amortisation of acquired intangibles |
|
|
0 |
0 |
0 |
0 |
0 |
Exceptionals |
|
|
(606) |
0 |
0 |
0 |
0 |
Share-based payments |
|
|
(8) |
(39) |
(73) |
(66) |
(83) |
Reported operating profit |
|
|
289 |
2,616 |
2,575 |
3,524 |
4,663 |
Net Interest |
|
|
(283) |
20 |
(289) |
(265) |
(264) |
Joint ventures & associates (post tax) |
|
|
0 |
0 |
0 |
0 |
0 |
Exceptionals |
|
|
0 |
0 |
0 |
0 |
0 |
Profit Before Tax (norm) |
|
|
620 |
2,675 |
2,360 |
3,325 |
4,482 |
Profit Before Tax (reported) |
|
|
6 |
2,636 |
2,286 |
3,259 |
4,399 |
Reported tax |
|
|
(49) |
(322) |
(283) |
(532) |
(717) |
Profit After Tax (norm) |
|
|
571 |
2,353 |
2,076 |
2,793 |
3,765 |
Profit After Tax (reported) |
|
|
(43) |
2,314 |
2,003 |
2,727 |
3,682 |
Minority interests |
|
|
0 |
0 |
0 |
0 |
0 |
Discontinued operations |
|
|
0 |
0 |
0 |
0 |
0 |
Net income (normalised) |
|
|
571 |
2,353 |
2,076 |
2,793 |
3,765 |
Net income (reported) |
|
|
(43) |
2,314 |
2,003 |
2,727 |
3,682 |
|
|
|
|
|
|
|
|
Basic average number of shares outstanding (m) |
|
18.2 |
20.2 |
20.7 |
20.9 |
20.9 |
EPS - basic normalised (p) |
|
|
3.1 |
11.7 |
10.0 |
13.4 |
18.0 |
EPS - normalised (p) |
|
|
3.1 |
11.6 |
10.0 |
13.3 |
18.0 |
EPS - basic reported (p) |
|
|
(0.2) |
11.5 |
9.7 |
13.1 |
17.6 |
Dividend per share (p) |
|
|
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
|
|
|
|
|
|
|
Revenue growth (%) |
|
|
46.4 |
58.2 |
42.0 |
28.1 |
24.7 |
Gross Margin (%) |
|
|
25.9 |
27.0 |
26.5 |
26.7 |
26.7 |
EBITDA Margin (%) |
|
|
4.8 |
6.5 |
5.1 |
5.0 |
5.2 |
Normalised Operating Margin |
|
|
2.5 |
4.7 |
3.3 |
3.5 |
3.7 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
|
|
4,477 |
7,102 |
14,067 |
15,124 |
16,255 |
Intangible Assets |
|
|
3,238 |
5,537 |
6,432 |
6,971 |
7,465 |
Tangible Assets |
|
|
1,239 |
1,565 |
7,634 |
8,153 |
8,790 |
Investments & other |
|
|
0 |
0 |
0 |
0 |
0 |
Current Assets |
|
|
11,194 |
16,035 |
24,687 |
28,821 |
34,099 |
Stocks |
|
|
6,906 |
11,686 |
15,060 |
19,068 |
23,307 |
Debtors |
|
|
740 |
1,348 |
1,915 |
2,452 |
3,058 |
Cash & cash equivalents |
|
|
3,548 |
3,001 |
7,712 |
7,301 |
7,734 |
Other |
|
|
0 |
0 |
0 |
0 |
0 |
Current Liabilities |
|
|
(6,022) |
(10,000) |
(14,940) |
(18,028) |
(21,511) |
Creditors |
|
|
(5,188) |
(7,379) |
(10,722) |
(13,710) |
(17,096) |
Tax and social security |
|
|
0 |
0 |
0 |
0 |
3 |
Short term borrowings |
|
|
(834) |
(2,621) |
(4,219) |
(4,319) |
(4,419) |
Other |
|
|
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
|
|
(290) |
(1,415) |
(4,368) |
(4,154) |
(3,804) |
Long term borrowings |
|
|
(127) |
(24) |
(4,278) |
(4,064) |
(3,714) |
Other long term liabilities |
|
|
(163) |
(1,391) |
(90) |
(90) |
(90) |
Net Assets |
|
|
9,359 |
11,722 |
19,445 |
21,763 |
25,039 |
Minority interests |
|
|
0 |
0 |
0 |
0 |
3 |
Shareholders' equity |
|
|
9,359 |
11,722 |
19,445 |
21,763 |
25,042 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Op Cash Flow before WC and tax |
|
|
1,688 |
3,656 |
4,092 |
5,133 |
6,649 |
Working capital |
|
|
(1,416) |
(3,618) |
(598) |
(1,558) |
(1,459) |
Exceptional & other |
|
|
(607) |
28 |
(73) |
(66) |
(83) |
Tax |
|
|
0 |
(104) |
(283) |
(532) |
(717) |
Net operating cash flow |
|
|
(335) |
(38) |
3,137 |
2,978 |
4,390 |
Capex |
|
|
(1,509) |
(2,195) |
(7,680) |
(2,601) |
(3,034) |
Acquisition: deferred payments |
|
|
0 |
0 |
(409) |
(409) |
(409) |
Net interest |
|
|
(130) |
(47) |
(289) |
(265) |
(264) |
Equity financing |
|
|
9,535 |
0 |
4,100 |
0 |
0 |
Dividends |
|
|
0 |
0 |
0 |
0 |
0 |
Other |
|
|
0 |
0 |
0 |
0 |
0 |
Net Cash Flow |
|
|
7,561 |
(2,280) |
(1,140) |
(297) |
683 |
Opening net debt/(cash) |
|
|
4,974 |
(2,587) |
(356) |
784 |
1,081 |
FX |
|
|
0 |
0 |
0 |
0 |
0 |
Other non-cash movements |
|
|
0 |
49 |
0 |
0 |
0 |
Closing net debt/(cash) |
|
|
(2,587) |
(356) |
784 |
1,081 |
398 |
Source: Gear4music accounts, 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gear4music 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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. |
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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 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gear4music 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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 12, 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 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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