The Pebble Group — Positioned to benefit from re-emerging confidence

The Pebble Group (LSE: PEBB)

Last close As at 22/05/2024

GBP0.64

0.00 (0.00%)

Market capitalisation

GBP107m

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Research: TMT

The Pebble Group — Positioned to benefit from re-emerging confidence

The Pebble Group’s FY23 results were as previously flagged. Facilisgroup, Pebble’s digital commerce segment, grew FY23 revenues by 8% after an H2 slowdown in gross merchandise value (GMV) for its partners affected revenue earned from its preferred supplier base. At Brand Addition, selling into large, global brands, revenue from tech and consumer clients trailed FY22. Both group segments are well placed to benefit from rebuilding corporate assurance and continued investment, although precise timing is uncertain. Pebble has considerable financial resource, with £15.9m in net cash (excluding leases) at end FY23. Management is proposing a doubled dividend of 1.2p and a £5.0m share buyback to enhance shareholder value.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

The Pebble Group

Positioned to benefit from re-emerging confidence

FY23 results

Media

21 March 2024

Price

67.5p

Market cap

£113m

Net cash (£m) at end December 2023 (excluding leases)

15.9

Shares in issue

167.5m

Free float

93.2%

Code

PEBB

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.4

21.5

(40.4)

Rel (local)

19.8

21.4

(43.0)

52-week high/low

118.5p

51.0p

Business description

The Pebble Group provides digital commerce, products and related services to the global promotional products industry through two focused, complementary and differentiated businesses: Facilisgroup and Brand Addition.

Next events

AGM

May 2024

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

The Pebble Group is a research client of Edison Investment Research Limited

The Pebble Group’s FY23 results were as previously flagged. Facilisgroup, Pebble’s digital commerce segment, grew FY23 revenues by 8% after an H2 slowdown in gross merchandise value (GMV) for its partners affected revenue earned from its preferred supplier base. At Brand Addition, selling into large, global brands, revenue from tech and consumer clients trailed FY22. Both group segments are well placed to benefit from rebuilding corporate assurance and continued investment, although precise timing is uncertain. Pebble has considerable financial resource, with £15.9m in net cash (excluding leases) at end FY23. Management is proposing a doubled dividend of 1.2p and a £5.0m share buyback to enhance shareholder value.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

115.1

10.9

5.1

0.0

13.2

0.0

12/22

134.0

12.4

5.8

0.6

11.7

0.9

12/23

124.2

9.9

4.6

1.2

14.7

1.8

12/24e

128.5

10.4

4.7

1.4

13.4

2.0

12/25e

133.0

11.2

5.0

1.5

10.7

2.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Twin approaches to large addressable market

Pebble’s FY23 revenue was down 7%, being a blend of Facilisgroup (14% group) up 8% and Brand Addition (86%) down 9%, with two divergent business models. Facilisgroup generates SaaS revenues at inherently stronger margins. Its growth strategy centres on driving GMV and increasing the attach rate (percentage placed through its own preferred supplier network or benefiting from upsell). The North American addressable market is big (21.6k potential customers) and the medium-term ambition is to grow to $50m of annual recurring revenue from the current $21m. Brand Addition handles the promotional product needs and logistics of some of the world’s largest brands. H223 reflected more cautious spending by technology and consumer clients; positively, the company retained all clients during this period. We anticipate some recovery in FY24, with early signs of improvement in tech.

Return to growth in FY24e, first thoughts on FY25e

FY24 has reportedly started in line with expectations and our revenue forecast is unchanged, with adjusted EBITDA edged back from £16.5m to £16.3m. Our first thoughts on FY25e assume top-line growth of 4% (3% at Brand Addition; 5% at Facilisgroup), which we see as a base level of progress. Margins should rebuild as returns on prior investment improve. Our £18.2m end-FY24 net cash projection (excluding leases) is pre the proposed £5m share buyback, 7.4m shares at the current price.

Valuation: Discount to blended peer set

The share price performances of US SaaS stocks used as Facilisgroup comparators have been very mixed over the year to date, with a median decline of 5%, while the marketing stocks used to benchmark Brand Addition have dipped by 2%. Averaging across FY24/25e on EV/EBITDA, our blended multiple suggests a value of 89p at parity to peers, from 80p based on a similar exercise in November.

Fundamental strengths, with difficult H2 trading

The promotional products distribution sector is large – estimated at $50bn globally, of which around half is in the US – and highly fragmented. The Pebble Group comprises two businesses operating within this market with differentiated propositions, and which have experienced a more challenging trading period in H223, as was flagged in November’s trading update and which was born out with the publication of the full year results.

Exhibit 1: Segmental performance and forecasts

FY22

% growth

FY23

% growth

FY24e

% growth

FY25e

% growth

Facilisgroup revenue

16.6

31%

17.9

8%

18.9

6%

19.8

5%

Brand Addition revenue

117.4

15%

106.3

-9%

109.6

3%

113.2

3%

Group revenue

134.0

15%

124.2

-7%

128.5

3%

133.0

4%

Facilisgroup adjusted EBITDA

9.0

1%

8.9

-2%

9.7

10%

10.4

7%

Brand Addition adjusted EBITDA

11.5

19%

9.5

-17%

9.3

-2%

9.7

4%

Group costs

(2.4)

14%

(2.4)

-3%

(2.8)

18%

(2.9)

4%

Group adjusted EBITDA

18.0

1%

16.0

-11%

16.3

2%

17.2

6%

Facilisgroup adj. EBITDA margin

54%

50%

51%

53%

Brand Addition adj. EBITDA margin

10%

9%

9%

9%

Group adjusted EBITDA margin

13.5%

12.9%

12.7%

13.0%

Source: Company accounts, Edison Investment Research

Facilisgroup building recurring revenue streams

Facilisgroup sells its core Syncore software product into the promotional product distributors, typically to those with revenues of around $2–25m annually (numbering around 1,600 according to management). At the year-end, there were 242 contracted partners (clients), a number that it clearly would like to grow, although it is worth noting that these will be of different scale and that the overall number may also decline from M&A.

GMV put through the platform in FY23 was $1.42bn (+1%), implying a 5% decline in H223 over H222, reflecting overall levels of corporate confidence trending softer in the period. Facilisgroup is identifying the attach rate as a key performance indicator, being the percentage of GMV that is channelled through the preferred supplier chain and/or where additional services are being sold ie added value is being delivered. This was 1.56% in FY23, up from 1.46% in FY22.

Being a software and service product, gross margin is 100%. Adjusted EBITDA margin at 50% was down from 54% in FY22, but it should be noted that this reflects the investment being made in developing and bringing to market new products and services and in building up the sales and marketing team.

Following the departure of the then president of Facilisgroup in October, day-to-day running of the segment has been led by the group CEO, Chris Lee, who has been strengthening the operational team, including the recruitment of a chief product officer. FY24 has reportedly started in line with the board’s expectations, with fewer partners (due to corporate activity) being more than offset by increases in GMV and spend through preferred suppliers.

Brand Addition step-up in gross margin

The H223 slowdown was more marked at Brand Addition, as was disclosed in the November 2023 trading update. The company works with large brands, handling their promotional products, which may be destined for external marketing purposes or used for internal promotions or rewards. In H223, it experienced notably lower demand from clients in the consumer and tech verticals, resulting in revenues down 34% over H222. For the tech clients, this reflects – at least in part – the well-publicised, large-scale reductions in personnel, as well as the downturns in their external spend on marketing and promotion. For the consumer vertical, and particularly in Health & Beauty, this was more of a tough comparative against a period when those companies were aggressively trying to rebuild demand in the post-COVID recovery period. We would expect, therefore, for the consumer volumes to settle and grow from these levels, while the tech spend should pick up again.

Client retention has reportedly remained strong and is a clear attestation of the value that Brand Addition delivers. That service has become more complex over time, and that is reflected in the increase in gross margin to 34.1% from 30.7%. We have modelled a modest settling back to around 33%, which aligns with management guidance.

Strong cash generation

The group continues to generate good levels of cash – plenty to fund the ongoing development in product and sales infrastructure at Facilisgroup. Having paid a maiden dividend of 0.6p for FY22, the proposed FY23 dividend of 1.2p represents 0.3x adjusted EPS. This equates to a 35% dividend payout. Future dividend policy is to pay 30% of profits after tax.

Management has outlined a further move to enhance shareholder return through a share buyback of up to £5m (7.4m shares at the current price of 67.5p). We will build this into our modelling as it is spent, as both timing and pricing are indeterminate, so it is not factored into our modelled year-end cash figure of £18.2m (excluding leases). If the entire suggested sum is spent, the net cash would therefore drop to £13.2m, which should still be perfectly adequate to meet the working capital cycle.

The expected return to shareholders of £7m (the £5m buyback plus dividend) reflects the combination of management’s confidence in the outlook, the current share valuation and a focus on enhancing shareholder value.

Valuation

Sum of the parts valuation approach

Exhibit 2: Peer sum-of-the-parts valuation

EV/Sales (x) year 1

EV/EBITDA (x) year 1

EV/EBITDA (x) year 2

M&C Saatchi

1.0

5.6

4.8

4imprint

1.5

13.5

12.5

Kin and Carta

1.3

10.8

8.3

Next Fifteen

1.6

7.1

6.7

Altitude

0.8

9.7

6.7

The MISSION Group

0.6

3.9

3.6

Dianomi

0.3

7.7

5.3

Median Advertising

1.0

7.7

6.7

Value of Brand Addition on marketing services (£m)

104.1

72.1

64.7

Median US SaaS

1.6

11.0

10.3

Value of Facilisgroup on US SaaS (£m)

27.9

97.4

99.8

Total (£m)

132.1

169.4

164.5

Central cost multiple (x)

10.0

9.0

less central costs (£m)

-28.0

-25.2

Implied EV (£m)

132.1

141.4

139.3

Implied market capitalisation (£m)

140.3

149.7

147.6

Implied share price (p)

83.8

89.4

88.2

Source: LSEG. Note: Share prices as at 15 March 2024.

We look at the valuation on a sum-of-the-parts basis, given that the business models of the two segments are so different. We use a set of UK-listed marketing companies to benchmark the valuation of Brand Addition and a set of US-listed SaaS businesses for Facilisgroup, while acknowledging that in neither case is the peer set directly comparable.

Using the metric of EV/EBITDA, averaged across the current year and one forecast year, the marketing stocks are valued by the markets on the whole at lower multiples than the software stocks. This is reflected in the average implied valuations of Facilisgroup at £98.6m and Brand Addition at £68.4m. Subtracting out central costs at 10x current year and at 9x FY25e gives an implied group market capitalisation of £149m (averaged across FY24 and FY25), or 89p per share (November 2023: 80p).

Exhibit 3: Financial summary

£000s

2021

2022

2023

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

115,101

134,025

124,171

128,500

133,000

Cost of Sales

(73,128)

(81,279)

(69,988)

(72,349)

(74,696)

Gross Profit

41,973

52,746

54,183

56,151

58,304

EBITDA

 

 

15,378

18,042

15,978

16,258

17,240

Operating profit (before amort. and excepts.)

 

 

11,475

12,896

10,447

10,808

11,590

Amortisation of acquired intangibles

(894)

(1,420)

(1,901)

(1,200)

(1,200)

Exceptionals

0

0

0

0

0

Share-based payments

(715)

(1,253)

(548)

(1,250)

(1,250)

Reported operating profit

9,866

10,223

7,998

8,358

9,140

Net Interest

(549)

(520)

(589)

(450)

(348)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

10,926

12,376

9,858

10,358

11,242

Profit Before Tax (reported)

 

 

9,317

9,703

7,409

7,908

8,792

Reported tax

(1,970)

(2,448)

(1,614)

(1,898)

(2,198)

Profit After Tax (norm)

8,599

9,675

7,709

7,872

8,431

Profit After Tax (reported)

7,347

7,255

5,795

6,010

6,594

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

8,599

9,675

7,709

7,872

8,431

Net income (reported)

7,347

7,254

5,795

6,010

6,593

Average Number of Shares Outstanding (m)

167

167

167

167

167

EPS - basic normalised (p)

 

 

5.14

5.78

4.60

4.70

5.04

EPS - normalised fully diluted (p)

 

 

5.12

5.77

4.59

4.69

5.02

EPS - basic reported (p)

 

 

4.39

4.33

3.46

3.59

3.94

Dividend (p)

0.00

0.60

1.20

1.35

1.50

Revenue growth (%)

39.7

16.4

(7.4)

3.5

3.5

Gross Margin (%)

36.5

39.4

43.6

43.7

43.8

EBITDA Margin (%)

13.4

13.5

12.9

12.7

13.0

Normalised Operating Margin

10.0

9.6

8.4

8.4

8.7

BALANCE SHEET

Fixed Assets

 

 

63,901

69,786

69,579

71,779

73,379

Intangible Assets

55,674

60,002

60,991

63,891

66,091

Tangible Assets

7,927

9,492

8,306

7,606

7,006

Investments & other

300

292

282

282

282

Current Assets

 

 

51,566

65,198

57,908

61,181

65,083

Stocks

10,093

15,447

11,852

12,322

12,753

Debtors

29,422

34,693

30,158

30,629

31,701

Cash & cash equivalents

12,051

15,058

15,898

18,230

20,629

Other

0

0

0

0

0

Current Liabilities

 

 

31,469

39,045

30,840

31,607

32,572

Creditors

30,065

36,413

28,965

29,732

30,697

Tax and social security

20

1,063

381

381

381

Short term borrowings / leases

1,384

1,569

1,494

1,494

1,494

Other

0

0

0

0

0

Long Term Liabilities

 

 

9,423

10,350

8,495

8,495

8,495

Long term borrowings / leases

6,388

7,490

6,130

6,130

6,130

Other long term liabilities

3,035

2,860

2,365

2,365

2,365

Net Assets

 

 

74,575

85,589

88,152

92,857

97,396

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

74,575

85,589

88,152

92,857

97,396

CASH FLOW

Operating Cash Flow

15,378

18,061

15,960

16,258

18,440

Working capital

(2,861)

(3,362)

708

(173)

(540)

Exceptional & other

(13)

19

(18)

0

0

Tax

(521)

(1,712)

(2,517)

(1,898)

(2,198)

Net operating cash flow

 

 

11,983

13,006

14,133

14,187

15,702

Capex

(5,282)

(8,379)

(8,530)

(7,800)

(7,900)

Acquisitions/disposals

0

0

0

0

0

Net interest

(549)

(520)

(589)

(450)

(348)

Equity financing

0

0

(395)

0

0

Dividends

0

0

(1,005)

(2,004)

(2,256)

Other (including lease payments)

(1,360)

(1,737)

(165)

(1,600)

(1,600)

Net Cash Flow

4,792

2,370

3,449

2,333

3,599

Opening net debt/(cash)

 

 

1,913

(4,279)

(5,999)

(8,274)

(10,607)

FX

193

655

(1,192)

0

0

Other non-cash movements

1,207

(1,305)

18

0

0

Closing net debt/(cash)

 

 

(4,279)

(5,999)

(8,274)

(10,607)

(14,205)

Closing net debt/(cash) excluding leases

 

 

(12,051)

(15,058)

(15,898)

(18,230)

(20,629)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by The Pebble Group and prepared and issued by Edison, in consideration of a fee payable by The Pebble Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by The Pebble Group and prepared and issued by Edison, in consideration of a fee payable by The Pebble Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

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London, WC1R 4PS

United Kingdom

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Braemar — Diversification paying dividends

Braemar’s FY24 trading update was in line with expectations, with revenues of c £150m and underlying operating profit of c £18m. Underlying operations continue to expand and diversify and the company remains well-positioned to drive its future growth strategy. The trading outlook is promising and Braemar should be able to leverage its strong balance sheet in pursuit of strategic growth. We have maintained our underlying estimates for FY24 and FY25, but edge down the valuation based on the lower FY24 dividend expectations. The revised valuation offers nearly 100% upside.

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