Park Group — Update 8 April 2016

Appreciate Group (LN: APP)

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27.80

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Market capitalisation

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Research: Financials

Park Group — Update 8 April 2016

Park Group

Martyn King

Written by

Martyn King

Director, Financials

Financials

Park Group

Continuing to innovate

Trading update

Financial services

8 April 2016

Price

74p

Market cap

£136m

Net cash (£m) as at 30 September 2015

11.9

Shares in issue

183.7m

Free float

98.3%

Code

PKG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.9)

1.4

26.2

Rel (local)

(3.3)

(0.1)

40.8

52-week high/low

96.0p

52.0p

Business description

Park Group is a financial services business. It is one of the UK’s leading multi-retailer gift voucher and prepaid gift card businesses, focused on the corporate gift and consumer markets. Sales are generated via e-commerce, a direct sales force and agents.

Next events

Preliminary results

7 June 2016

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 has issued a trading update ahead of the release of preliminary results for the year just ended (31 March 2016) on 7 June 2016. Trading ahead of Christmas continued the strong trend of prior periods and management says that it expects the FY16 results to be broadly in line with market expectations. It describes the early order indications for FY17 as encouraging, although there are some signs that general macro headwinds have increased. We have very modestly reduced our earnings estimates, which we believe were slightly ahead of consensus.

Year end

Billings* (£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

336.0

9.4

4.14

2.30

17.9

3.1

03/15

372.9

10.9

4.60

2.40

16.1

3.2

03/16e

385.2

11.8

5.07

2.55

14.6

3.4

03/17e

419.2

12.8

5.51

2.70

13.4

3.6

Note: PBT and EPS are on a statutory basis. *Billings is a non-statutory measure of sales.

Drivers of growth remain in place

Park’s transformation in recent years has been based on its ongoing investment in IT, the internet and “smart” device channels, to support digital product capability and distribution. The in-house development of the flexecash prepaid card and continuing product innovations based on it have been at the heart of the change. Consumer sales have grown steadily (7% in FY16) while underlying Corporate sales growth has more than offset the decline in lower-margin sales to the consumer credit sector since these peaked in FY13. At less than £4m in FY16, there is little risk of any future drag. The financial position remains solid, with no debt and strong seasonal cash flows that peaked at £206m in FY16, earning interest for shareholders.

New chairman appointed

It was announced earlier this year that Peter Johnson, founder and non-executive chairman of Park, would retire in early June. Laura Carstensen, who joined the board as a non-executive director in 2013, has been appointed as his successor. She is a former partner of Slaughter & May, where she specialised in competition and regulation law and has since held a number of senior public and private sector roles. Mr Johnson disposed of his remaining beneficial and non-beneficial interest in Park Group, accounting for 50.2m shares, on 22 December 2015, greatly increasing the free float, and we would expect this to be reflected in improved trading liquidity over time.

Valuation: Potential for upside

The shares performed well over the past year and are trading at around our fair value of 78p (was 73p), set by reference to our DCF and a P/E comparison with businesses that share similar characteristics (which we have rolled forward to a calendar 2016 basis). The improved free float is a positive and Park’s cautious expansion in European markets has the potential to lift growth and valuation.

Investment update

Ahead of the release of preliminary results for the year just ended (31 March 2016) on 7 June 2016, Park has released a trading update. The period up to Christmas, a key trading period for Park, continued the strong trend of prior periods, although there appears to have been more of a general economic headwind since. Overall, management says that it expects the FY16 results to be broadly in line with market expectations and that the early order indications for FY17 are encouraging, giving confidence of another year of progress. Early (calendar) year orders are especially important for Park in its Christmas pre-payments division, roughly half of the group by sales and only slightly less by operating profits before central costs. By the end of February the majority of orders for the following Christmas have been placed, with the vast majority of revenues and profits from those orders reported in the second half of the fiscal year.

Returning to FY15, the Consumer division (predominantly Christmas pre-payments) saw sales growth of c 7%, in line with guidance made with the interim results. The Corporate business has continued to make progress in its core product lines, although that progress has been masked by the continued fall-away of sales to the home collected consumer credit sector. This marks the third year of decline in consumer credit sales as its corporate customers have focused on credit collection rather than expansion, and continue to adapt their marketing processes. Park says that sales will be less than £4m, having peaked at £52.7m in FY13. Total Corporate sales are expected to be c £2m lower than in FY15 as a result, although this implies strong growth in non-consumer credit sales within the division from £99.9m in FY13 to an estimated c £171m in FY16, reflecting ongoing product innovation and increasing market reach.

Exhibit 1: Estimate revisions

Billings (£m)

Revenues (£m)

IFRS PBT (£m)

Fully diluted basic EPS (p)

DPS (p)

 

New

Old

Var

New

Old

Var

New

Old

Var

New

Old

Var

New

Old

Var

03/16e

385.2

401.3

-4%

297.1

309.9

-4%

11.8

12.2

-3%

5.07

5.14

-1%

2.55

2.55

0%

03/17e

419.2

439.6

-5%

316.0

327.0

-3%

12.8

13.4

-4%

5.51

5.65

-2%

2.70

2.70

0%

Source: Park Group data, Edison Investment Research

We have reduced our estimates for sales, primarily as a result of the weakness in sales to the consumer credit sector, which we assume will remain at a low level in FY17, but as we have previously indicated, we understand the sales to consumer credit customers generate a below-average margin, leading to only modest changes to our profit estimates. Although our forecast FY16 PBT falls by 3% (from being slightly ahead of consensus), the confirmation of cash balances well ahead of the prior year leads us to slightly increase our forecast for interest earnings. We have also reduced our tax charge, closer to the UK basic rate and the effective rate in H116. Our forecast EPS falls just 1% for FY16 and 2% for FY17.

Outside of sales to consumer credit customers, we do also detect signs of some slowdown coming into the current calendar year (Q4 of FY16). We suspect that this is reflecting the various uncertainties (global growth, Brexit, government budget cuts) that will be obvious to all. For similar reasons we believe it sensible to assume a slightly lower growth in sales than previously in FY17, although the main drivers of Park’s growth in recent years – investment in digital product capability and online delivery supported by constant product innovation – remain in place.

Exhibit 2: Financial summary

Year end 31 March

£000s

2014

2015

2016e

2017e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

Billings

336,040

372,887

385,200

419,234

Revenue

 

 

269,563

293,329

297,081

315,963

Cost of sales

(245,928)

(265,966)

(268,435)

(284,983)

Gross margin

23,635

27,363

28,647

30,980

Distribution costs

(2,521)

(2,761)

(2,614)

(2,686)

Administrative expenses

(11,421)

(13,057)

(13,604)

(14,966)

EBITDA

 

 

9,693

11,545

12,428

13,328

Depreciation & amortisation

(1,260)

(1,308)

(1,171)

(1,103)

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

(390)

(314)

(145)

(144)

Share-based payments

(215)

(235)

(746)

(788)

Exceptional operating income

0

0

0

0

Operating profit

7,828

9,688

10,366

11,293

Operating profit (normalised)

 

 

8,433

10,237

11,257

12,225

Net Interest

1,576

1,245

1,453

1,522

Profit Before Tax (norm)

 

 

10,009

11,482

12,710

13,747

Profit before tax (IFRS)

 

 

9,404

10,933

11,819

12,815

Tax

(2,124)

(2,434)

(2,482)

(2,691)

Profit after tax (norm)

 

 

7,877

8,926

10,041

10,860

Profit after tax (IFRS)

 

 

7,280

8,499

9,337

10,124

Discontinued operations

0

0

0

0

Profit after tax (IFRS)

 

 

7,280

8,499

9,337

10,124

Average Number of Shares Outstanding (m)

178.8

184.7

184.2

183.7

Basic EPS - IFRS (p)

 

 

4.16

4.66

5.10

5.51

Fully diluted EPS - IFRS (p)

 

 

4.14

4.60

5.07

5.51

EPS - normalised fully diluted (p)

 

 

4.33

4.83

5.45

5.91

Dividend per share (p)

2.30

2.40

2.55

2.70

Gross margin on billings (%)

7.0

7.3

7.4

7.4

EBITDA margin as % of billings

2.9

3.1

3.2

3.2

Operating margin (before GW and except) as % billings

2.5

2.7

2.9

2.9

BALANCE SHEET

Fixed assets

 

 

13,744

13,932

13,202

12,588

Intangible assets

5,110

4,488

4,121

3,813

Tangible assets

8,626

8,143

7,789

7,482

Retirement benefit obligation

0

1,293

1,293

1,293

Other

8

8

0

0

Current assets

 

 

84,484

103,903

113,026

130,246

Debtors

12,128

14,937

14,702

15,953

Cash held in trust

57,514

65,728

71,050

79,339

Cash available to group

14,842

23,238

27,275

34,953

Current liabilities

 

 

(100,848)

(115,095)

(118,515)

(129,593)

Creditors

(63,614)

(71,909)

(74,236)

(82,264)

Provisions

(37,234)

(43,186)

(44,279)

(47,329)

Short-term borrowings

0

0

0

0

Long-term liabilities

 

 

(1,515)

(2,907)

(2,207)

(1,507)

Long-term borrowings

0

0

0

0

Deferred tax

(294)

(273)

(273)

(273)

Retirement benefit obligation

(1,221)

(2,634)

(1,934)

(1,234)

Net assets

 

 

(4,135)

(167)

5,506

11,734

Minorities

311

0

0

0

Shareholders' equity

 

 

(3,824)

(167)

5,506

11,734

CASH FLOW

Operating cash flow

4,094

14,106

10,039

14,164

Net interest

1,948

1,176

1,453

1,522

Tax

(2,079)

(2,132)

(2,482)

(2,691)

Capex

(977)

(597)

(594)

(632)

Acquisitions/disposals

52

41

0

0

Financing

4,700

0

0

0

Dividends

(3,704)

(4,198)

(4,380)

(4,685)

Other

(1)

0

0

0

Net cash flow

4,033

8,396

4,036

7,679

Opening net (debt)/cash

10,810

14,843

23,239

27,275

Closing net (debt)/cash

 

 

14,843

23,239

27,275

34,953

Source: Park Group data, Edison Investment Research

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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