The CEO’s ambitious transformation programme is delivering results and Majestic is now in good shape to execute on plans to double its expenditure on new customer recruitment at an attractive expected future payback of 4.7x for every £1 invested. FY18 results demonstrated that the entrepreneurial Naked Wines division is the clear growth engine, providing opportunity to reduce UK earnings exposure and accelerate online sales.
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Majestic Wines |
Naked ambition
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Consumer |
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19 June 2018 |
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The CEO’s ambitious transformation programme is delivering results and Majestic is now in good shape to execute on plans to double its expenditure on new customer recruitment at an attractive expected future payback of 4.7x for every £1 invested. FY18 results demonstrated that the entrepreneurial Naked Wines division is the clear growth engine, providing opportunity to reduce UK earnings exposure and accelerate online sales.
Clear progress
Two years into Majestic’s transformation programme a solid set of FY18 results reinforces progress. The entrepreneurial Naked Wines business is the clear engine for growth, delivering an 11.3% increase in revenue to £156.1m and six-fold rise in adjusted EBIT to £8.7m. The Majestic Retail adjusted EBIT flat-lined at £13.3m, with FX pressure on margins wiping out a 1.9% revenue increase to £263.8m. In our view, given the wider high street woes and price competition from the supermarkets, this is a credible result. A renewed focus on Majestic Commercial provides opportunity to inject momentum back into the underperforming division.
Attracting and engaging with customers
New customer recruitment and retention of existing customers is at the heart of the business. Having completed infrastructure projects and reduced the net debt/adjusted EBITDA ratio to 0.35x (company target 0.5x) at end FY18, the business appears well positioned for future growth. The aim is to double the annual investment in new customers from £14m in FY18 (+£5–8m expected in FY19) at an attractive forecast payback of 4.7x. Furthermore, we believe the move away from warehouse-style Majestic outlets towards a more personal service-led customer ‘experience’ will be a key differentiator for the retail business.
On track to meet market expectations
Although current trading in the UK has been tougher compared with the prior year, the company still expects to achieve FY19 consensus forecasts. This is in part attributable to Naked Wines’ exposure to overseas markets (57% of sales) and the proven resilience of profitable new customer recruitment during downturns.
Undemanding valuation
Majestic’s share price has held its gains since the interim results last November. Assuming that management can execute against its strategy the forward P/E does not look stretched for an international growth business with 45% of sales online.
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Consensus estimates
Source: Bloomberg |
EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Disclaimer
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Disclaimer
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Yesterday Orexo announced the launch of Zubsolv in the EU by its partner Mundipharma, triggering a €3m (c SEK30.6m) milestone payment. Zubsolv is Orexo’s biggest product, which the company markets itself in the US. The EU launch of Zubsolv by Mundipharma may be underappreciated by investors for reasons we explain below. We have adjusted our model to include net cash including the milestone payment and exchange rate changes which amend our valuation to SEK67.8 per share from SEK63.0 per share.