Park Group — Results in line and strategic plan taking shape

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Research: Financials

Park Group — Results in line and strategic plan taking shape

Park Group results for the year to 31 March 2019 were in line with our expectations and those of the market. The core offering of higher-value, own-branded, multi-retailer redemption product, c 85% of billings, showed good progress, although profit deferral to future periods increased under IFRS 15. Despite this and costs associated with the strategic plan, adjusted profits were little changed. Plan implementation costs will have an increased effect this year, but management targets a relatively quick payback period and medium-term income statement benefits of £2–5m pa.

Martyn King

Written by

Martyn King

Director, Financials

Financials

Park Group

Results in line and strategic plan taking shape

FY19 results

Financial services

1 July 2019

Price

67.0p

Market cap

£125m

Net cash (£m) at 31 March 2019 (net of overdraft)

34.6

Shares in issue

186.3m

Free float

100%

Code

PKG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.9)

(7.6)

(9.5)

Rel (local)

(4.7)

(10.0)

(6.5)

52-week high/low

80.0p

64.0p

Business description

Park Group is a specialised financial services business and is the UK’s leading provider of multi-retailer redemption products to the corporate and consumer markets. Consumers can access these products directly through its market-leading Christmas Savings offering. Corporate customers use these products to supply a range of incentive and reward products, often tailor-made.

Next events

FY19 final DPS paid

1 October 2019

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 Group results for the year to 31 March 2019 were in line with our expectations and those of the market. The core offering of higher-value, own-branded, multi-retailer redemption product, c 85% of billings, showed good progress, although profit deferral to future periods increased under IFRS 15. Despite this and costs associated with the strategic plan, adjusted profits were little changed. Plan implementation costs will have an increased effect this year, but management targets a relatively quick payback period and medium-term income statement benefits of £2–5m pa.

Year end

Billings*
(£m)

Revenue
(£m)

Adj. PBT**
(£m)

EPS***
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

412.8

111.1

12.6

5.5

3.05

12.2

4.5

03/19

426.9

110.4

12.5

4.8

3.20

14.0

4.8

03/20e

442.5

113.8

11.8

5.1

3.20

13.1

4.8

03/21e

462.5

117.5

13.3

5.8

3.35

11.6

5.0

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 is adjusted for exceptional items. ***EPS is fully diluted on a statutory basis.

Good momentum in core offering

Billings grew 3.4% to £426.9m or c 5% adjusted for £6.2m of discontinued low-margin business, while higher-value, core multi-retailer billings grew 6.3% with cards particularly strong. IFRS 15 effects related to the growing share of multi-retailer product and cards in particular held back reported revenues and gross profit, with net profit deferral into future accounting periods increasing to c £1.2m from £0.3m in the prior year. Adjusted PBT of £12.5m (FY18: £12.6m) is before the previously disclosed £1.2m property impairment, and if adjusted for profit deferral, one-off pensions costs (£0.3m) and strategic development costs (£0.5m), ‘underlying PBT’ would have been considerably higher and well above the prior year. With total cash balances continuing to grow and a debt-free balance sheet, DPS grew 5%.

Investing for faster medium-term growth

Management expects similar top-line trends in the current year and continues to guide to implementation costs for the strategic business plan of c £2.0m (net of cost savings achieved). This includes the income statement impacts from significantly increased capex. Our FY20 forecasts are little changed, other than the assumption of a pause in DPS growth given the capex requirements, and we introduce an FY21 forecast, which includes reduced net investment costs and further top-line growth but does not capture the medium-term strategic business plan benefits. Management targets P&L benefits of £2–5m pa after FY21.

Valuation: Attractive yield and medium-term growth

Our modified DCF valuation is unchanged at 90p, but now incorporates a two-stage, long-term growth assumption to capture the benefits of the strategic investment (see page 15). With near-term earnings suppressed by investment spend, the implied CY20e P/E at 90p is 18.0x and CY21e 16.2x, which we believe is reasonable.

Investment summary

Company description: Building on strengths

Park has a strong track record of profitable growth and product development, and is supported by a strong, liquid, debt-free balance sheet. It is the UK’s leading provider of multi-retailer redemption products, a market that is large and growing, while fragmentation provides ample scope for market share gains. Having undertaken a business review, the new management team assembled over the past year is implementing a strategic business review aimed at building on the group’s existing strengths and market positioning to accelerate growth, and improving efficiency by enhancing its products, providing product and branding clarity, and investing in its core infrastructure with a particular focus on increased digitalisation.

Financials: Investing for growth

FY19 saw good underlying progress in Park’s core multi-retailer redemption offering, and through the business-to-business (B2B) channel. We expect these trends to continue over the next two years, although the current (FY20) year will be affected by implementation costs for the strategic business plan. We expect further investment costs in FY21, but at a reduced level and supporting FY21 profit growth. Management targets a payback period of no more than three years from the investments planned and from 2021 onwards (effectively affecting FY22 and outside our forecasting period) aims for £2.0–5.0m pa in income statement benefits. Park’s business model generates strong operational cash flow, and it has a liquid and debt-free balance sheet to support its investment plans. Given the scale of the investment, we forecast a pause in dividend growth in FY20 before growth resumes in FY21.

Valuation: Attractive yield and medium-term growth

Our approach to valuing Park is to consider a potential absolute valuation, based on a modified DCF analysis, alongside a relative value based on a comparison with a selected group of listed stocks which are engaged in activities that provide some overlap with Park. Our DCF value is unchanged at 90p, although we have introduced an intermediate stage of growth to capture the benefits of the strategic business plan investment. Given that our near-term forecasts are suppressed by investment spending and capture none of the benefits, it is difficult to attach a target multiple, but we note that the 90p DCF value implies P/E multiples (18.0x CY20 and 16.2x CY21) that appear reasonable in the context of the comparator stocks. Meanwhile, Park offers an attractive yield approaching 5% with dividends well covered by earnings and supported by a strong debt-free balance sheet.

Sensitivities

Our forecast assumptions are set out in detail in the financial section below. The key sensitivities to our outlook for the business (and discussed in more detail on page 16) are:

The impact of interest rates on cash balances.

General economic growth.

Brand perception and customer confidence, especially in Christmas savings.

Business continuity and IT.

Regulation, especially in respect of e-money.


UK leader in multi-redemption cards and vouchers

Park Group is a UK-based, specialised financial services business, and is the UK’s leading provider of multi-retailer redemption products (cards, vouchers and e-codes) to the corporate and consumer markets. The UK market is large (the UK Gift Card & Voucher Association estimates c £6bn per year) and growing, while fragmentation provides ample scope for market share gains.

Customers access Park products directly in the business to consumer (B2C) channel through the Park Christmas Savings and the online highstreetvouchers.com brands, while the business to business (B2B) access brand Love2shop Business brand provides similar products to business, primarily for customer and employee incentives and rewards programmes. Park’s own in-house, multi-retailer redemption products are the core of its offering, accepted by a wide range of carefully selected retail partners, and account for the overwhelming majority of billings (c 85% of the total in FY19). It also offers third-party sourced single retailer products (eg M&S gift cards), a range of goods (hampers and other merchandise) and provides various services (eg software as a service).

For the group as a whole, the majority of sales are generated online, which complements and supports traditional distribution through a direct salesforce and agents. Most income is generated from the service fees paid to Park by partner retailers, leisure and other service providers, based on the face value of money spent in their outlets. Interest is earned on all prepaid cash until the obligation to the redeemers has been settled.

Park has a cash-generative business model, a debt-free balance sheet and a good track record of profitable growth, supporting a progressive dividend policy. This is a very positive starting point for the new senior management team to build on. The new strategy that was presented in December 2018, following a comprehensive review of the business, has identified a number of opportunities to accelerate growth and improve efficiency. The core multi-retailer redemption offering, where the scale of the market provides significant potential, will be given even greater focus and the digitalisation of the business will be accelerated to enhance the attractiveness, accessibility, reach and delivery of existing products, tap new market segments and areas of demand, and enhance efficiency.

Exhibit 1: Growing billings*

Exhibit 2: Progressive, well covered DPS

Source: Park Group. Note: *Billings are the gross value of goods and services shipped and invoiced.

Source: Park Group

Exhibit 1: Growing billings*

Source: Park Group. Note: *Billings are the gross value of goods and services shipped and invoiced.

Exhibit 2: Progressive, well covered DPS

Source: Park Group

In the following section, we review Park’s business model and strategy, including a discussion of IFRS 15 accounting. Readers already familiar with the company may wish to go to page 9 where we review the recently released FY19 results, followed by an update on our financial forecasts and valuation.

Business model and strategy

Hampers to fintech

As a multi-million-pound leader in the UK multi-retailer redemption market, the Park of today is unrecognisable from its origins as a Christmas hamper supplier, established in 1966, and run out of the family butchery chain of founder Peter Johnson, who retired as chairman in 2016. Over the years, Park first introduced multi-retailer redemption vouchers into the Christmas savings business (in the 1980s), an attractive and convenient alternative to hampers for customers, and later expanded its distribution by entering the corporate (B2B) market. The 2010 introduction of FCA-authorised prepaid cards, supported by the in-house developed ‘flexecash’ card engine, marked the start of the group’s further evolution towards the electronic and digital product that now accounts for a little more than half of core billings.

Exhibit 3: Product split (FY19)*

Source: Park Group. Note: *Split of ‘core’ multi and single retailer redemption billings of £413.2m. Billings of other goods and services were £13.7m.

The specialised financial service business of today

Exhibit 4 provides a pictorial summary of the group and its business model. Consumers have traditionally accessed Park products directly through the Christmas savings offering, but in recent years have increasingly done so through the fast-growing highstreetcouchers.com (hsv.com) website. Park is the UK market leader in Christmas savings, accounting for 92% of FY19 Consumer business billings, and operates in the UK under the Park, Family and Country brands and in Ireland under the Park Ireland brand. Christmas savings customers purchase its own multi-retailer redemption products, third-party retailer cards and vouchers, hampers and other goods, typically on a 45-week prepaid instalment plan, which offers them a way to budget for Christmas and a relatively convenient way of shopping. Customers and agents are typically recruited from September/October onwards for orders that will be fulfilled in Christmas of the following year and as a result, the first half of the financial year is loss-making, with most revenues and all of the profits generated in the second half. Many customers still prefer to deal with Park via agents (we estimate a little more than half), although a growing share of customers deal directly with Park, encouraged by its ongoing investment in e-commerce and mobile enablement, and use of social media. The 1.8% decline in Christmas 2018 customers to c 428k obscures the success in attracting a record c 60k new direct accounts, substantially offsetting the steady attrition of agency customers, which mirrors other agency distribution business. The strategic plan includes a number of initiatives aimed at improvements in both products and customer experience that are designed to support further growth in direct customers as well as supporting the agency channel.

The hsv.com website served 133k other (ie non-Christmas savings) consumer customers in FY19, up 10% on the previous year. Unlike Christmas savings, purchases are more ‘ad-hoc’ and spontaneous, and average order sizes are smaller with shorter duration customer cash balances on which to earn interest.

Exhibit 4: Park Group business model

Source: Park Group

Consumers are also provided with Park products indirectly through the corporate access brand Love2shop Business. The Corporate business provides c 37k businesses with primarily customer and employee incentive, recognition and rewards products, and packages based on the broad Park product offering. Park estimates that c 2m individual recipients receive its products indirectly through the B2C channel, for redemption with retail and other partners. The core incentive and rewards product has shown strong growth over a number of years, although progress at the divisional level has been tempered by reductions in other areas such as sales to the home collected credit sector and intermediaries. This underlying growth has been supported by ongoing product investment and the development of flexible online platforms. The customer base has typically been ‘SME’ in nature, although larger businesses are increasingly being targeted.

Park’s own multi-retailer redemption products are provided under the Love2shop brand, the UK’s leading multi-retailer gift card and prepaid card brand, with high levels of customer awareness. The voucher is accepted by almost 200 retail and other partners in more than 25,000 outlets, while the card, requiring additional connectivity, is accepted in a more focused subset of this group. Historically, the multi-redemption product has operated within the ‘closed-loop’ network of retail partners from which it receives service fees. However, in 2016 Park began to sell a Mastercard product, for ‘open-loop’ use at a broader range of outlets and for which customers have proved willing to pay a premium for the added flexibility.

In addition to Park’s own multi-retailer redemption offering, customers also purchase Park hampers and other third-party merchandise, and third-party single retailer cards and vouchers. Corporate customers also pay consultancy and service fees in respect of incentive rewards programmes provided by Park.

A key performance indicator for the group is billings, a non-statutory measure of customer activity, which represents the gross value of vouchers, cards, and other goods and services provided. This is our preferred measure of ‘sales’ as, unlike statutory revenues, it is unaffected by changes in business mix between multi-retailer redemption product and other goods and services, including single retailer cards, vouchers and e-codes.

Revenues for the core multi-retailer redemption products are reported ‘net’, representing the service fee received by Park from the partner retailer when the card, voucher or e-code is redeemed, as well as cardholder fees and breakage, also recognised in line with redemption. Cardholder fees are levied, at card expiry, on unspent balances in respect of cards where the holder has a right of redemption. Breakage relates to the recognition of unspent balances on vouchers and cards where the holder has no right of redemption. The introduction of IFRS 15 for the first time in FY19 brought voucher reporting (previously on a ‘gross’ basis) into line with cards and greatly reduced reported revenues but not ultimate profitability (ie excluding timing recognition effects). Because revenues are reported net, there is no cost of sales and gross margin is therefore 100%.

Revenues for single-retailer redemption products and other goods and services continue to be reported on a gross basis, representing the gross value of goods and services shipped and invoiced to customers in the period. The reported gross margin, after cost of sales, is significantly lower than that reported for multi-retailer redemption product.

A more detailed explanation of the impact that IFRS 15 has had on the financial statements can be found on page 17. It is important to note that cash flow and ultimate profitability were unaffected by the new accounting standard.

Strategic opportunities to accelerate growth

The strategic review undertaken by the new management team during the second half of 2018 and communicated to the market in December 2018 recognises the group’s significant historical development in multi-retailer redemption products, where it is the leader in a fragmented UK market, and its good track record of profitable growth, but concluded that there is much that the group can do to improve its current offering and performance, and there is significant untapped market potential still to be addressed. Feedback from this customer review showed that there is a strong appetite for the multi-retailer product in the market and that Park is generally well regarded by its own customers, but with upside potential to increase revenues and efficiency from improving and simplifying the product range, as well as how the products can be bought and used. Market analysis indicates there is untapped potential in the £2bn+ consumer market for multi-redemption cards and vouchers in which it is currently only modestly represented.

Significant market opportunity

The UK Gift Card & Voucher Association, an industry trade body, estimates that the UK market has shown double-digit annual growth over the past five years to reach more than £6bn. It estimates that growth in the second half of 2018 was 11.7%, up from 8.7% in the first half. Within this overall market growth there is a significant trend shift in the mix of product formats with cards, and to an even greater extent digital, growing strongly and increasing share at the expense of paper vouchers. This trend is not new, and Park has been investing in its card and digital capabilities over many years. However, the new management team intends to push this transformation harder to support growth in existing markets, open new markets and improve efficiency.

Exhibit 5: Changing format usage

Source: Park Group, UK Gift Card & Voucher Association. Note: H118, latest available detailed data.

Further analysis of the marketplace highlights a particular opportunity from addressing the broader consumer market for a multi-redemption product, alongside Park’s existing dominant position in the Christmas savings consumer segment and strong positions in the corporate market segments (Exhibit 6). Park believes that enhancements to its product offering are also likely to strengthen its appeal to business customers.

Exhibit 6: Park’s existing market position

£m

Market size

Park share

Consumer

Christmas savings

300

71.0%

Other Consumer

2,600

0.2%

Total consumer

2,900

7.5%

Business

Incentives

800

6.5%

Employee benefits

700

5.0%

Staff rewards

1,400

6.6%

Total business

2,900

6.2%

Source: Park group, UK Gift Card & Voucher Association

Strategic business plan initiatives and actions

Park’s strategic business plan and investment is aligned with industry growth and the strong trend towards card and digital delivery. In brief, the four pillars of the strategy (with more details below) are:

Productivity. Park wants to be more efficient and effective in what it does. It is investing in people technology and services and is in the process of moving the majority of its core operations to new offices in Liverpool’s city centre.

Appeal. Park wants to broaden its customer appeal to drive faster growth, including the launch of new product targeting a broader customer base. It has already expanded its e-code and virtual card offering, is exploring opportunities to establish an in-store gift card, and is reviewing its marketing practices with the goal of getting better value for the money that it spends.

Clarity. The core multi-retailer redemption offering has been given even greater focus, with a simplified product range, faster migration from paper to card, and a review of the brand architecture. To provide focus, the hamper production operation has been separated out and management structures have been realigned to better co-ordinate the key functions of customer management (consumers, businesses and retailers), and product and marketing,

Experience. Park recognises the potential from being easier to work with for all its customers, consumers, business customers and retailer partners.

Relocation well advanced

The group is in the process of moving the majority of its core operations to new offices in Liverpool’s city centre (fulfilment and redemption activities will remain at the current site, along with separated hamper production). The existing site is effectively industrial, with scattered office buildings that are inappropriate to support efficient, creative and collaborative working. The move is also intended to provide the core activities with access to a wider talent pool, benefiting from an existing hub of like-minded fintech businesses in central Liverpool. Management anticipates that productivity improvements and the potential sale or subletting of vacated space should substantially mitigate the cost of the move and accelerate the payback period.

Accelerated digitalisation

Park has accelerated its IT investment in both back office functions and digital capability in order to improve both efficiency and functionality. In the near term, investment in digital enablement will see enhanced app capability, new mobile digital enablement and new personalised e-delivery of e-codes. An immediate goal is to be able to offer full digital enablement across the product range, integrated to support contactless and mobile wallets for consumers. Over the medium term, management would like to reach a point where digital products are the default, with paper vouchers and cards providing support as demanded by consumers, rather than representing separate product lines. If achieved, the ease of use for the consumer would be greatly enhanced. With the technology in place, it should also be possible to develop a common list of retailers/redeemers across payment methods, and also to provide valuable analytical feedback to the retailers.

New consumer product

The group continues to work on the details of a new product targeting a substantial share of the £2bn+ consumer market for multi-redemption cards and vouchers in which it is currently only modestly represented. The process is still at a relatively early stage and management has given few details as yet. It is expected that a prototype will soon be completed and that market testing will commence later in 2019. The intention is to build on existing strengths, while more effectively targeting a broader demographic than the current Christmas savings business and will initially focus on gifting. Recognising market trends and the fact that by 2020 half of the workforce will be millennials, the product is expected to be digitally enabled and allow for greater personalisation so as to make the gifting process a more rewarding experience for the consumer. It seems likely that the profitability of the product will continue to be driven by retailer service fees and interest earned on customer balances, although compared with Christmas savings these balances may be of shorter duration and potentially more variable.

Strategic plan financials

Management has not changed its previous guidance that the implementation costs for the strategic business plan will negatively affect the current (FY20) year by £2.0m, net of savings that are already being achieved. This includes £1m of investment in the new consumer market product, £0.8m in temporary overlapping property costs resulting from the relocation of the core operations, and £1.0m in technology-related costs, offset by cost benefits of £0.8m realised during the year.

Additional IT capex to support implementation of the strategic plan is expected to be c £4.0m over the next two years, with a three-year payback period. Property capex related to the migration of the core activities to central Liverpool will generate £1.5m of property capex in the current (FY20) year, but management expects the disposal of redundant property assets to generate proceeds of c £5.0m in FY21.

Income statement benefits of £2.0–5.0m are targeted by management from 2021 onwards, effectively emerging from FY22. This expectation is based on:

reduced costs of paper vouchers and related overheads;

improved margins from the mix shift to card, code and virtual products;

operating efficiencies from the office move, offsetting rental costs; and

incremental customers and revenues as a result of the new product, once launched.

Management and governance

A substantially new senior management team has been assembled over the past year or so, led by chief executive Ian O’Doherty, who joined Park in January 2018. He brings a strong background in financial services, specifically in banking, payments and card services, which appears well suited to leading the continued development of the business. Prior to joining Park, his experience includes 25 years at MBNA, most recently as chairman and CEO of MBNA in the UK, where he oversaw the reorganisation of the business and the re-engineering of its digital capabilities. The new CFO, Tim Clancy, took up his post in August 2018, joining Park from Assurant Europe, the European subsidiary of Assurant, the US-listed global insurance provider, where he had held the role of chief financial officer since 2013. That role has included overseeing several acquisitions in the UK and Europe and their integration into the group. Other important appointments have been made in the areas of operation and technology, including a new chief information officer, chief transformation officer and head of HR.

Overseeing and steering the group through the changes in management has been the board of directors, comprising five members, led by non-executive chairman Laura Carstensen, and including two additional non-executive directors in addition to the executive members, the CEO and CFO. Laura Carstensen was elected to the board in September 2013 and became chairman in June 2016. She is a former partner in city law firm Slaughter and May, and a former member and deputy chairman of the UK Competition Commission (now the Competition and Markets Authority). In view of her experience both inside and outside of the group, we welcome the recent announcement that she has agreed to continue in her role for another three years from June 2019, ensuring that she will remain fully involved in guiding the executive team as it continues to implement the strategic business plan.

The other two non-executive directors are Michael de Kare-Silver, who joined the board in September 2013 and intends to retire by rotation at the 2019 AGM, and John Gittins, who joined the board in September 2016 and has more than 20 years’ experience as a CFO across a number of sectors and territories.

Good FY19 progress with the core offering

FY19 results were in line with our expectations and market consensus and showed good underlying progress in Park’s core offering of higher-value, own-branded, multi-retailer redemption products. At the headline level, sales were negatively affected by the discontinuance of some low-margin business and, although the business mix developments are positive for margin, the deferral of revenue and profit to subsequent reporting periods increased under IFRS 15 accounting. Peak cash flow increased further, maintaining a strong debt-free balance sheet and supporting dividend growth.

We discuss the FY19 results in detail below and in the following sections provide a detailed overview of our forecasts and valuation.

Exhibit 7: Summary of full year results to 31 March 2019 (FY19)

£m unless stated otherwise

FY19

FY18*

Consumer billings

232.1

232.6

-0.2%

Corporate billings

194.8

180.2

8.1%

Total billings

426.9

412.8

3.4%

Revenue

110.4

111.1

-0.6%

Cost of sales

(79.1)

(79.6)

-0.6%

Gross profit

31.3

31.4

-0.5%

Distribution costs

(2.9)

(3.0)

-2.3%

Admin costs

(17.4)

(17.1)

1.7%

Adj operating profit (before exceptional)

10.9

11.3

-3.3%

Net finance income

1.6

1.3

23.8%

Adj profit before tax (before exceptional)

12.5

12.6

-0.6%

Exceptional**

(1.2)

0.0

Tax

(2.4)

(2.4)

Net profit after tax

8.9

10.2

-12.8%

Basic EPS (p)

4.78

5.50

Diluted EPS (p)

4.77

5.48

DPS (p)

3.20

3.05

5.1%

‘Peak cash’ - including held in trust

235.8

229.0

3.0%

Period-end group cash (exc overdraft)

34.6

34.2

Source: Park Group. Note: *FY18 restated under IFRS 15. **FY19 exceptional item relates to impairment of land and buildings.

The key financial and operational developments for the period were as follows:

Group billings increased by 3.4% to £426.9m (FY18: £412.8m), driven by good growth in Corporate with Consumer billings broadly flat.

Corporate billings grew 8.1% to £194.8m, or 46% of the total, despite the discontinuance of £6.2m of low-margin third-party product through the intermediary channel. Strong growth was achieved in incentive and rewards products, and Park was particularly successful at attracting new larger clients, with revenues from new clients who billed more than £100k increasing fivefold. The total number of corporate clients served by Park increased by 7.5% to just over 37,000.

Exhibit 8: Corporate billings driven by incentive and reward growth

£m

FY19

FY18

Change

Customer incentives

40.2

29.3

37.2%

Intermediaries

54.7

66.0

-17.1%

Staff rewards

75.3

64.5

16.7%

Employee benefits

20.8

16.9

23.1%

Multi- and single retailer subtotal

191.0

176.6

8.2%

Other income

3.8

3.6

5.6%

Total Corporate billings

194.8

180.2

8.1%

Source: Park Group

Consumer billings were little changed at £232.1m (FY18: £232.6m), or 54% of the total. Christmas savings billings (for Christmas 2018) were effectively flat, which in part reflects a tough retail environment but also the headwinds in the agency sales channel, which saw overall customer accounts decline slightly despite strong growth in direct customers. Other consumer customers, through the online channel highstreetvouchers.com (hsv.com) grew c 10%, and billings at a similar rate.

Exhibit 9: Consumer billings stable with good growth in other consumer

£m

FY19

FY18

Change

Christmas savings

213.6

213.9

-0.1%

Other consumer

8.6

7.8

10.3%

Multi- and single retailer subtotal

222.2

221.7

0.2%

Other income

9.9

10.9

-9.2%

Total Consumer billings

232.1

232.6

-0.2%

Source: Park Group

Reflecting the group’s strategy to promote its own-branded product, multi-retailer billings (cards, vouchers and e-codes) increased by 6.3%, while third-party single retailer billings and other income (hampers and other goods, fees and services) were lower. The share of multi-retailer product increased to 84.9% from 82.6% the year before.

Exhibit 10: Billings growth focused on core multi-retailer offering

£m

FY19

FY18

Change

Multi-retailer

362.4

340.9

6.3%

Single retailer

50.8

57.5

-11.7%

Multi- and single retailer subtotal

413.2

398.4

3.7%

Other income

13.7

14.4

-4.9%

Total billings

426.9

412.8

3.4%

Source: Park Group

Within the mix of multi- and single retailer billings, cards grew strongly, increasing the share of the total to 47.7% (FY18: 42.3%). In underlying terms, adjusting for a £4.3m negative impact as part of the discontinued intermediary business, codes also advanced and paper (vouchers) declined. These mix changes reflect structural changes in the marketplace and the group’s strategy, and the higher margin earned on cards is positive for ultimate profitability.

Exhibit 11: Increasing share of card billings

£m

FY19

FY18

Change

Paper

200.0

211.8

-5.6%

Card

197.1

168.6

16.9%

Code

16.1

18.0

-10.6%

Total multi- and single retailer billings

413.2

398.4

3.7%

Source: Park Group

Revenues were marginally lower, down 0.6% to £110.4m. Multi-retailer redemption product revenues were strongly ahead, including an increased share of higher-value cards and reflecting the trend in billings. However, as these sales are reported on a net basis, the impact was outweighed by the lower revenues from single retailer product, reported on a gross basis, and to a lesser extent the small reduction in other income. The lower revenue on single retailer product includes the effect of the discontinued intermediary business.

Exhibit 12: Marginal decrease in revenues reflects IFRS 15

£m

FY19

FY18

Change

Multi-retailer (‘net’)

41.1

36.1

13.9%

Single retailer (‘gross’)

55.6

60.6

-8.3%

Multi- and single retailer subtotal

96.7

96.7

0.0%

Other income (‘net’)

13.7

14.4

-4.9%

Total revenues

110.4

111.1

-0.6%

Source: Park Group

The increased share of multi-redemption business in the year increased the net deferral of revenues and gross profit in the year. Gross profit reduced slightly, by 0.5% to £31.3m, as the net revenue deferral increased to £1.2m from £0.3m in FY18.

Distribution costs fell slightly despite increased billings, reflecting operational efficiencies made possible by the continued increase in digital product delivery. Administrative expenses rose modestly despite c £0.5m of expenses related to the strategic review undertaken by the new management team, c £0.5m of additional payroll costs relating to the new management team, and a one-off pension charge of £0.3m relating to a UK court ruling in respect of guaranteed minimum pensions for males and females. The main offset was a significant reduction in share-based payment expenses of c £0.4m.

As previously disclosed, the FY19 results included an exceptional non-cash impairment charge of £1.2m due to the write-down of the value of its Valley Road site following an external review by property consultants. Much of the site will be surplus to requirement as the group shifts its core business functions and most of its staff to new offices in the centre of Liverpool, and the group is considering the options, which may include a sale and leaseback of those areas still required.

Net finance income benefited from an increase in average cash balances (both the shareholder balance and the segregated customer balances on which Park earns interest) and a slight pick-up in interest margin, reflecting firmer short-term bank deposit rates. The seasonal ‘peak’ cash balance for the year reached £235.8m (FY18: £229.0m) and the average cash balance during the year was £174m (FY18: £165m).

Reported PBT was £11.3m compared with £12.6m in FY18. Adjusted PBT, excluding the exceptional charge, was £12.5m, little changed on FY18. Further adjustment for the increased IFRS 15 impact, non-recurring pensions costs and strategic development costs suggests an underlying PBT of more than £14m and provides a better indication of the underlying progress in the year.

Exhibit 13: Underlying FY19 PBT progression

£m

Reported PBT

11.3

Add back: impairment of property

1.2

Adjusted PBT

12.5

Add back: increased IFRS 15 impact

0.9

Add back: non-recurring pensions costs

0.3

Add back: strategic development costs

0.5

Underlying PBT

14.2

£m

Reported PBT

Add back: impairment of property

Adjusted PBT

Add back: increased IFRS 15 impact

Add back: non-recurring pensions costs

Add back: strategic development costs

Underlying PBT

11.3

1.2

12.5

0.9

0.3

0.5

14.2

Source: Park Group data

Net income of £8.9m was 12.8% lower than in FY18 and diluted EPS was 4.77p. The final dividend was declared at 2.15p per share, up 4.9% on the year, making a total dividend for the year of 3.2p, also ahead by 4.9%. The continued increase in DPS reflects a good level of earnings cover, a strong liquid and debt-free balance sheet, and management confidence for the future.

Forecasting assumptions and estimates

FY19 in line and modest changes to FY20

As noted above, the FY19 results detailed in the section above were very much in line with our estimates, revised after the trading update in late April 2019, and market consensus. Billings were slightly ahead of our expectations and revenues very slightly below due to the IFRS 15 effects being slightly greater than we had allowed for. Adjusted PBT was in line with our estimate, but the tax charge was higher than we allowed for, due to the treatment of the exceptional property impairment, with a small impact on net income and EPS.

Exhibit 14: Performance versus forecast and forecast revisions

Billings (£m)

Revenues (£m)

Adj. PBT (£m)*

Diluted EPS (p)

DPS (p)

Actual

F'cast

Diff.

Actual

F'cast

Diff.

Actual

F'cast

Diff.

Actual

F'cast

Diff.

Actual

F'cast

Diff.

03/19

426.9

420.7

1.5%

110.4

111.2

-0.7%

12.5

12.5

0.1%

4.8

4.9

-2.1%

3.20

3.20

0.0%

New

Old

Chg

New

Old

Chg

New

Old

Chg

New

Old

Chg

New

Old

Chg

03/20e

442.5

445.5

-0.7%

113.8

117.5

-3.1%

11.8

11.7

0.5%

5.1

5.1

0.5%

3.20

3.35

-4.5%

03/21e

462.5

N/A

N/A

117.5

N/A

N/A

13.3

N/A

N/A

5.8

N/A

N/A

3.35

N/A

N/A

Source: Edison Investment Research. Note: *FY19 PBT adjusted for £1.2m exceptional property impairment.

We set out our forecasts in detail below, but in summary we have made only a small change to FY20 billings, although our revenue forecast shows a slightly larger adjustment as we continue to refine our forecasting under IFRS 15. We expect Park’s own-branded, multi-retailer redemption product to grow faster than overall billings and this is positive for margins and PBT (forecast marginally increased). The only material change to our FY20 forecasts is that we now assume DPS will be held at the same level as FY19, reflecting the strategic investment spending that will negatively affect PBT by a net c £2.0m. Strategic investment spending will also affect cash flow in FY20, but we expect the shareholder cash balance to remain strong at c £34m.

We also introduce FY21 estimates for the first time. We expect similar underlying trends, with continued growth in billings and the share of multi-retailer redemption product. We have not factored in any significant benefit from the strategic investment programme but do expect profitability to benefit from a reduction in net strategic spending.

Key forecasting assumptions

Our key forecasting assumptions include further growth in billings, with a focus on multi-retailer redemption products. Under IFRS 15 accounting, we expect this business mix to suppress revenue growth relative to billings growth, but to be positive for profitability. The caveat is that if the multi-redemption share of billings is materially stronger than we forecast, this may increase profit deferral into subsequent periods, as was seen in FY19. Specifically, we forecast:

Billings growth driven by Corporate. We look for a slight increase in billings growth during FY20 and FY21, driven by continued growth in Corporate, focused on incentive and rewards products, and modest growth in Consumer, with continued strong growth in direct (hsv.com) sales and slight growth in the larger Christmas savings business in FY21. We have not allowed for any material impact from the strategic business plan or any contribution from the planned new consumer product during the forecast period.

Exhibit 15: Billings by business segment

£m

Change

FY19

FY20e

FY21e

FY19

FY20e

FY21e

Corporate

194.8

210.3

227.0

8.1%

7.9%

7.9%

Consumer

232.1

232.2

235.6

-0.2%

0.0%

1.5%

Group

426.9

442.5

462.5

3.4%

3.6%

4.5%

Source: Park Group data, Edison Investment Research estimates

Further increase in share of multi-retailer redemption and cards/e-codes. In terms of product mix, in line with management’s strategy and market trends, we expect faster growth in Park’s own-branded, multi-retailer redemption product, and within this in cards and e-codes. This mix shift is positive for ultimate profitability.

Exhibit 16: Split of multi- and single retailer redemption billings

By product

FY19

FY20e

FY21e

Multi-retailer

85%

85%

85%

Single store

12%

12%

11%

Other

3%

3%

3%

Total multi- and single retailer redemption

100%

100%

100%

By delivery mechanism

Paper

48%

44%

40%

Card

48%

51%

54%

Code/virtual

4%

5%

6%

Total multi- and single retailer redemption

100%

100%

100%

Source: Park Group data, Edison Investment Research estimates

Under IFRS 15, revenues will continue to trail billings. Given the growth that we forecast in multi-retailer redemption (reported net) versus single retailer (reported gross), we expect revenues to grow but at a lower rate than billings. Implicit in our assumptions is a broadly stable pattern of redemption activity and we also note that if the share of multi-retailer redemption products increases at an even faster rate than we forecast, this will tend to further suppress revenues versus billings.

Exhibit 17: Revenues by product

£m

Change

FY19

FY20e

FY21e

FY19

FY20e

FY21e

Multi-retailer ('net')

41.1

43.3

45.5

13.9%

5.4%

4.9%

Single retailer ('gross')

55.6

56.3

57.4

-8.2%

1.2%

2.0%

Multi and single retailer subtotal

96.7

99.6

102.9

0.0%

3.0%

3.2%

Other income ('gross')

13.7

14.2

14.7

-4.8%

3.9%

3.6%

Total revenues

110.4

113.8

117.5

-0.6%

3.1%

3.3%

Source: Park Group data, Edison Investment Research estimates

We expect gross profit to increase at a faster rate than either billings or revenues. This is driven by the increasing share of higher-profitability, multi-redemption product in our forecast sales mix, reported on a net basis, or effectively a 100% gross margin on revenues. In FY19, the strong increase in growth and share of multi-redemption product led to an increase in revenue and gross profit deferral, but our forecasts for a more moderate shift in product mix during FY20 and FY21 indicate a closer balance between new revenue deferral and run-off or revenue emergence from prior years. The increase in gross margin that we forecast, both relative to billings and revenues, reflects the mix shift towards higher-margin product and implicitly assumes no change in product margins or redemption patterns.

Exhibit 18: Gross profit development

£m unless stated otherwise

FY17

FY18

FY19

FY20e

FY21e

Billings

404.5

412.8

426.9

442.5

462.5

Revenue

119.6

111.1

110.4

113.8

117.5

Cost of sales

(89.9)

(79.6)

(79.1)

(80.4)

(82.4)

Gross profit

29.7

31.4

31.3

33.4

35.1

% change in gross profit

4.1%

5.8%

-0.5%

6.7%

5.2%

Gross margin on billings

7.3%

7.6%

7.3%

7.5%

7.6%

Gross margin on revenues

24.8%

28.3%

28.3%

29.3%

29.9%

Source: Park Group data, Edison Investment Research estimates

Our forecasts for administrative costs reflect management’s guidance of a net £2.0m in strategic business plan implementation costs in FY20. We expect some of this to fall away in FY21, substantially offsetting upward pressure from business growth and inflation in the year.

We expect interest income to grow modestly, driven by continued growth in total cash balances (monies held in trust and shareholder cash), and reflecting order and billings growth, particularly cards. We assume a similar c 0.9% margin on balances to that earned in FY19.

Our shareholder cash flow forecasts reflect the additional IT investment (£4.0m over two years) and property investment/disposal (£1.5m investment in FY20 and £5.0 disposal proceeds in FY21) guided to by management, and the recurring depreciation and amortisation effects are captured in our income statement forecasts.

Valuation

Our approach to valuing Park is to consider a potential absolute valuation, based on a modified DCF analysis, alongside a relative value based on a comparison with a selected group of listed stocks which are engaged in activities that provide some overlap with Park. We would not go so far as to call this a peer group comparison because no such listed group exists. Park’s competitor employee benefits and service providers are either private companies or relatively small parts of larger groups, complicating any attempt at a relative valuation approach. Our DCF value is unchanged at 90p, although we have introduced an intermediate stage of growth to capture the benefits of the strategic business plan investment. Given that our near-term forecasts are suppressed by investment spending and capture none of the benefits, it is difficult to attach a target multiple, but we note that the 90p DCF value implies multiples that appear reasonable in the context of the comparator stocks.

Our modified DCF valuation differs from a standard DCF in that we include the interest earned by Park on segregated customer cash balances (but not on the group cash balances), recognising that this is an integral part of the returns the company generates. The customer cash is excluded from the overall valuation and we also exclude the voucher provisions balance, as this will eventually flow out in settlement of vouchers that have been issued but not yet redeemed. Our key assumptions have been held constant for an extended period; however, we have now introduced a two-stage growth assumption to reflect the near-term drag and subsequent potential upside from the strategic business plan. For the first three years after the forecast period (to end-FY21), we now grow the free cash flow at 10% pa and then revert to the assumed long-term growth rate, unchanged at 5%, up until year 10. We have also pushed back in time our expectation of any normalisation in interest rates and assume a stepped increase to 1.5% in FY22 and 3% from FY23 (previously 3% from FY21). The terminal cash flow is valued at an unchanged 10x and we have applied a discount rate of 10%.

Our relative value comparison recognises the lack of direct comparators to Park. In incentive and rewards products, Sodexo and Edenred are both much larger and more international than Park, and the overlap with Sodexo is limited; Sodexo Benefits and Rewards Services is only a minor part of Sodexo Group. We therefore extend the comparator group to include payments service providers and companies engaged in UK home collected credit services (HCC), directed at a customer group with some demographic/socioeconomic overlap between the traditional customer bases of Park’s Christmas prepayments business (c 50% of Park). We recognise that the read-across is somewhat limited and note the difference between the savings nature of Park’s Christmas prepayments business and the lending nature of HCC. Given Park has no credit risk and we believe it has less regulatory risk, we would expect a higher valuation.

The strategic business plan has a similar distorting impact on the near-term comparison, but if we were to apply the 90p per share DCF value to our calendarised forecasts for Park, the 2019 (CY1) P/E would be 18.0x and that for 2020 (CY2) 16.2x. These are in line with the overall average shown in Exhibit 19 and well below the incentive and rewards and payments services average. The overall average is suppressed by the HCC rating.

We believe a successful implementation of management’s plans, leading to faster growth, increasing scale and a greater focus on digital payments services, has the potential to lift both earnings and valuation over time. On this basis, the multiples implied by our DCF value of 90p per share appear entirely reasonable.

Exhibit 19: Listed comparator data

Share price (local)

Market cap. (£m)

P/E (x) CY 1

P/E (x) CY 2

EV/EBITDA (x) CY 1

EV/EBITDA (x) CY 2

Yield (%)

Incentive

Edenred

44.9

9,771

33.4

29.6

18.1

16.4

1.9

Sodexo

102.8

13,576

19.3

17.7

11.4

10.7

2.7

Incentive average

26.4

23.7

14.8

13.5

2.3

Payment services

Euronet Worldwide

168.2

6,888

24.1

20.6

13.5

11.6

Wirecard

148.1

16,384

34.8

26.0

21.3

16.2

0.1

Payment services average

29.5

23.3

17.4

13.9

0.1

Home collected credit/consumer finance

Morses Club

138.5

180

10.1

8.9

7.7

6.8

5.6

Non-standard Finance

36.1

112

5.9

4.2

7.5

6.2

7.2

Provident Financial

412.5

1,045

8.2

6.7

2.4

HCC/consumer finance average

8.1

6.6

7.6

6.5

5.1

Whole group average

19.4

16.2

13.2

11.3

3.3

Park Group

67.0

125

13.4

12.0

7.8

6.9

4.8

Source: Refinitiv. Note: Edison estimates for Park Group. Earnings data on a calendar year (CY) basis. Prices at 1 July 2019.

Sensitivities

Our forecast assumptions are set out in the financial section above. We note the following fundamental sensitivities to the performance of the business and our forecasts:

The impact of interest rates on cash balances. During the year, the group accumulates substantial cash balances in the Christmas savings business, peaking around October/ November. Park earns interest on these balances, accounting for c 13% of FY19 adjusted PBT. Historically, the contribution has been higher, reflecting higher interest rates and was more than 30% in FY07 before the financial crisis and interest rate decline, with the base rate falling from 5.5% at the end of 2017. We note that if Park had been able to earn an additional 50bp for a full year, the FY19 adjusted PBT would have increased by c 7%.

General economic growth. The Christmas savings business has historically shown a generally resilient performance in time of economic stress, providing support and discipline to Christmas planning in difficult times. It is not fully immune, and saw billings decline by 2.7% in FY14 when prominent retailer failure and social security benefit uncertainty coincided with the peak marketing period. The corporate business depends much more on the health of the SME sector, although staff incentivisation can display countercyclical qualities. Given the fragmented nature of the UK market for prepaid gift cards, multi-retailer gift vouchers and digital rewards services, estimated by the UK Gift Card & Voucher Association to be worth c £6bn per year and growing, there is ample opportunity for Park to benefit from market share gains even in a weaker market environment.

Brand perception and customer confidence, especially in the Christmas savings operation. The group’s Christmas savings business is dependent on the confidence of its customers and their willingness to make prepayments. Since the high-profile collapse of Farepak in 2007, the industry has moved to voluntary segregated customer balances, which should support customer confidence. As a regulated financial services product, card prepayments are 100% segregated by law.

Business continuity and IT systems. The group is highly reliant on digital sales and distribution, particularly relating to prepaid e-money card transactions. Any significant loss of transaction capability or breach of security could have a serious impact on group performance and customer confidence. Park reports no significant issues in this respect and we note its increased investment in its IT infrastructure.

Regulation. As an FCA-regulated e-money issuer, the group would be affected by any changes in regulation of its prepaid card products. Christmas prepayment practices are covered by voluntary industry agreements, but any enforced changes in selling practices or customer protection could affect the group. Park has a small euro-denominated operation through its Republic of Ireland subsidiary and reports that it has plans in place in case of a hard Brexit. Given the small size of the operation, too small to be separately disclosed, we do not believe this poses a material risk.

Appendix: IFRS 15 changes and impacts

IFRS 15 (‘Revenue from contracts with customers’) is a new accounting standard in respect of revenue recognition that applies to businesses across all industries and became effective for annual reporting periods beginning on or after 1 January 2018. The main aim of the standard is to remove previous inconsistencies in revenue recognition and improve comparability.

Park reported under IFRS 15 for the first time with its interim results in December 2018 and the FY19 results are the first full year results on this basis. However, in order to provide investors with a clearer insight into the impacts on its financial statements, it adopted the ‘full retrospective method’ of IFRS 15 application and provided restated financial statements, from the beginning of FY15, when reporting FY19 interim results. For readers who are unfamiliar with the changes, we provide a summary below. Further details are available in a detailed presentation on the Park website.

IFRS 15 requires Park to report revenues for its Love2shop multi-retailer redemption vouchers on a ‘net’ basis compared with a ‘gross’ basis previously, bringing the accounting treatment into line with the group’s prepaid cards. The new standard also leads to a deferment of revenue and operating profit in respect of all the group’s multi-retailer redemption products. A summary of the changes is shown in Exhibit 20.

Exhibit 20: Summary of IFRS 15 accounting changes in respect of multi-retailer redemption cards and vouchers

Vouchers

Previous treatment

IFRS 15 treatment

Revenues

Face value on despatch

Service fee on redemption

Discounts

Netted against revenue on despatch

Netted against revenue on redemption

Agent commissions

Cost of sales as incurred

Cost of sales as redemption

Breakage

Cost of sales on despatch

Revenue on redemption

Cards

Previous treatment

IFRS 15 treatment

Service fee revenue

Service fee on redemption

Service fee on redemption

Card fee revenue

Card fees as levied

Card fees as levied

Discount

Netted against revenue on redemption

Netted against revenue on redemption

Agent commissions

Cost of sales as incurred

Cost of sales on redemption

Breakage (cards with no right of redemption)

Revenue on load

Revenue on redemption

Breakage (cards with right of redemption)

Fees recognised on and after expiry

Fees recognised on and after expiry

Source: Park Group

It is important to note that IFRS 15 affects the recognition of revenues and has no impact on other measures of customer activity such as order values or billings:

orders received from customers are not revenues, and where accompanied by cash prepayments are initially shown on the balance sheet as customer liabilities and segregated customer cash but have no P&L impact.

When invoiced or shipped to customers, orders become billings, a non-statutory measure of customer activity representing the value of vouchers, cards, and other goods and services provided by the group. Billings is unaffected by IFRS 15, both historically and going forward.

The key changes to revenue recognition under IFRS 15 are:

Previously, revenues were recognised in respect of all vouchers (in-house multi-retailer redemption and third-party provided single-retailer vouchers) when the vouchers were despatched to the customer (at the point of billing) and were recorded ‘gross’, generating revenues that were equal to face value less any discounts.

Under IFRS 15, multi-retailer redemption voucher revenues are now not recorded until the vouchers are redeemed and it is recognised on a ‘net’ basis, representing the service fees receivable from the retailers/redemption partners. This aligns the revenue recognition for multi-retailer vouchers and cards. As a result, the revenues reported for multi-retailer redemption vouchers on a ‘net’ basis are materially reduced, although ultimate profitability is unaffected. However, the recognition of revenue at redemption rather than at the point of billing has the effect of slightly deferring both revenues and profits (see below).

Revenue recognition for single retailer vouchers and gift cards (as well as other goods and services) remains the same under IFRS 15 and is on a gross basis.

Revenue recognition for Park’s own multi-retailer redemption prepaid cards remains unchanged, on a net basis.

There are other, less significant changes in the timing of the recognition of ‘breakage’, which itself arises from the fact that a certain proportion of the vouchers and cards sold by and distributed by Park will never be redeemed. In the case of Park’s own multi-retailer redemption vouchers and cards (but not third-party, single-retailer products), this is a source of additional earnings. Under IFRS 15, breakage for in-house vouchers is slightly deferred, being recognised in proportion to the rate of redemption rather than at the point of despatch, as was previously the case. Breakage is only recognised on those cards that have no right of redemption (ie where the customer cannot request a refund of the value loaded), representing a significant share of card sales through the corporate channel. This is slightly deferred under IFRS 15, from recognition at the point of loading to recognition in proportion to the rate of redemption, as with in-house vouchers. Rather than breakage being recognised on unredeemed balances, cards with a right of redemption are subject to account fees that are recognised on or after the expiry of the card.

Although the IFRS 15 impacts are relatively complex, it is important to stress that the historical restatement of reported profits is relatively small and is only a timing effect, with ultimate profitability (and cash flow) unaffected.

Exhibit 21 shows the restated data provided by the company for the four years to March 2018. The significant impact on revenue is substantially offset by changes to reported cost of sales, leaving a relatively modest impact on PBT, resulting from recurring timing effects as billings continued to grow from year to year. The extent of the PBT impact varies from year to year depending on changes in the product mix as well as the timing and profile of customer redemption activity. Assuming unchanged redemption patterns, it is generally the case that in those years when the share of in-house vouchers was increasing, the expected IFRS 15 impact on revenues and the amount of profitability deferred to later periods would be expected to be higher.

Exhibit 21: Summary of key IFRS 15 restatements

£m

FY15

FY16

FY17

FY18

Cumulative

Revenue

Revenue - as reported

293.3

302.5

310.9

296.2

IFRS 15 adjustment

(207.6)

(202.0)

(191.3)

(185.1)

Revenue - restated

85.8

100.6

119.6

111.1

Cost of sales

Cost of sales - as reported

(266.0)

(274.1)

(280.8)

(264.5)

IFRS 15 adjustment

206.8

202.0

190.8

184.9

Cost of sales - restated

(59.2)

(72.0)

(89.9)

(79.6)

Profit before tax (PBT)

PBT- as reported

10.9

11.9

12.4

12.9

48.0

IFRS 15 adjustment

(0.8)

0.0

(0.5)

(0.3)

(1.5)

PBT - restated

10.1

11.9

11.9

12.6

46.5

IFRS 15 PBT impact

-7%

0%

-4%

-2%

-3%

Source: Park Group

The average impact on previously reported PBT over the four-year period was to lower reported PBT by c 3%, within a range of 0–7%. This represents the net impact of income deferred in the period less the recognition of income deferred from previous periods.

As noted above, the net income deferral in FY19 increased to £1.2m, which we estimate would represent a c 12% reduction in PBT on the previous accounting basis. The change during the year reflected the strong growth in multi-redemption cards.

Deferred income at the end of FY19 was £7m (FY18: £5.8m). The majority of this is expected to be recognised over a two-year period, although this ‘run-off’ will to a greater or lesser extent be replaced by the deferred income in respect of new business. The net balance of the two depends on the rate of growth of the business, and the product mix. Given that we expect growth to accelerate as a result of the company’s strategic initiatives, with in-house multi-redemption product continuing to take a larger share of the total, the outstanding balance of deferred income is likely to increase, although at a slower pace than in FY19.

Exhibit 22: Financial summary

Year end 31 March

£'000s

2015

2016

2017

2018

2019

2020e

2021e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Restated

Restated

Restated

Restated

Consumer billings

196,796

208,352

216,771

232,635

232,096

232,185

235,562

Corporate billings

176,091

176,679

187,741

180,151

194,805

210,275

226,977

Total Billings

 

372,887

385,031

404,512

412,786

426,901

442,460

462,539

Revenue

 

85,769

100,556

119,637

111,054

110,394

113,802

117,544

Cost of sales

(59,193)

(72,030)

(89,944)

(79,628)

(79,117)

(80,427)

(82,435)

Gross profit

26,576

28,526

29,693

31,426

31,277

33,375

35,108

Gross margin as % billings

7.1%

7.4%

7.3%

7.6%

7.3%

7.5%

7.6%

Distribution costs

(2,761)

(2,909)

(2,940)

(3,002)

(2,934)

(3,009)

(3,099)

Administrative expenses excluding depreciation & amortisation

(14,914)

(15,176)

(16,348)

(15,702)

(16,007)

(18,970)

(18,470)

EBITDA

 

8,901

10,441

10,405

12,722

12,336

11,396

13,539

Depreciation & amortisation

0

0

0

(1,405)

(1,394)

(1,230)

(1,930)

Operating profit before exceptional items

 

8,901

10,441

10,405

11,317

10,942

10,166

11,609

Exceptional items

0

0

0

0

(1,210)

0

0

Operating profit

 

8,901

10,441

10,405

11,317

9,732

10,166

11,609

Net Interest

1,245

1,457

1,470

1,270

1,572

1,616

1,690

Profit Before Tax & exceptional items

 

10,146

11,898

11,875

12,587

12,514

11,782

13,299

Profit before tax

 

10,146

11,898

11,875

12,587

11,304

11,782

13,299

Tax

(2,284)

(2,177)

(2,361)

(2,398)

(2,422)

(2,239)

(2,527)

Profit after tax (IFRS)

 

7,862

9,721

9,514

10,189

8,882

9,543

10,772

Average number of shares (m)

182.5

183.7

183.9

185.3

186.0

186.3

186.3

Fully diluted average number of shares (m)

184.7

187.2

187.2

185.9

186.1

187.3

187.3

Basic EPS - IFRS (p)

 

4.3

5.3

5.2

5.5

4.8

5.1

5.8

Fully diluted EPS - IFRS (p)

 

4.3

5.2

5.1

5.5

4.8

5.1

5.8

Dividend per share (p)

2.40

2.75

2.90

3.05

3.20

3.20

3.35

Payout ratio

55.7%

52.0%

56.1%

55.4%

67.0%

62.5%

58.0%

BALANCE SHEET

Non-current assets

 

13,924

13,749

14,399

14,868

12,606

16,626

11,396

Goodwill

1,320

1,320

2,202

2,185

2,168

2,168

2,168

Other intangible assets

3,168

3,036

2,682

2,278

2,295

5,195

5,395

Property, plant, & equipment

8,143

8,003

7,688

7,684

6,216

7,336

1,906

Retirement benefit asset

1,293

1,390

1,827

2,721

1,927

1,927

1,927

Other non-current assets

0

0

0

0

0

0

0

Current assets

 

107,095

119,496

129,322

142,423

153,475

158,126

174,125

Inventories

3,186

2,182

2,632

3,808

4,574

4,737

4,905

Trade & other receivables

11,309

8,860

9,236

10,917

12,582

13,274

13,876

Monies held in trust

65,728

75,219

83,018

86,992

99,251

106,211

112,857

Cash & equivalents

26,333

32,735

34,236

40,311

36,868

33,704

42,286

Other current assets

539

500

200

395

200

200

200

Current liabilities

 

(121,545)

(128,164)

(133,789)

(142,604)

(148,818)

(153,909)

(159,961)

Trade & other payables

(77,688)

(83,135)

(87,201)

(94,592)

(89,952)

(92,917)

(96,208)

Tax payable

(671)

(262)

(424)

0

(580)

(580)

(580)

Provisions

(43,186)

(44,767)

(46,164)

(48,012)

(58,286)

(60,412)

(63,173)

Non-current liabilities

 

(2,907)

(1,881)

(1,118)

(662)

(553)

(553)

(553)

Deferred tax liability

(273)

(181)

(194)

(662)

(553)

(553)

(553)

Retirement benefit obligation

(2,634)

(1,700)

(924)

0

0

0

0

Net assets

 

(3,433)

3,200

8,814

14,025

16,710

20,290

25,006

Minorities

0

0

0

0

0

0

0

Shareholders' equity

 

(3,433)

3,200

8,814

14,025

16,710

20,290

25,006

CASH FLOW

Operating Cash Flow

14,106

12,184

9,603

10,540

6,874

8,672

12,175

Net interest

1,176

1,339

1,539

1,267

1,497

1,616

1,690

Tax paid

(2,132)

(2,490)

(2,258)

(2,537)

(1,576)

(2,239)

(2,527)

Capex

(597)

(1,126)

(717)

(1,020)

(1,152)

(5,250)

(1,700)

Acquisitions/disposals

41

52

(875)

1

0

0

5,000

Dividends paid

(4,198)

(4,380)

(5,052)

(5,370)

(5,668)

(5,963)

(6,056)

Other

0

0

305

0

345

0

0

Net cash flow

8,396

5,579

2,545

2,881

320

(3,164)

8,582

Opening net (debt)/cash

14,842

23,238

28,817

31,362

34,243

34,563

31,399

Closing net (debt)/cash

 

23,238

28,817

31,362

34,243

34,563

31,399

39,981

Overdraft

3,095

3,918

2,874

6,068

2,305

2,305

2,305

Closing net (debt)/cash as per balance sheet

 

26,333

32,735

34,236

40,311

36,868

33,704

42,286

Source: Park Group data, Edison Investment Research

Contact details

Revenue by geography

Valley Road
Birkenhead,
Merseyside, CH41 7ED
UK
+44 (0) 151 653 1700
www.parkgroup.co.uk

Note: Revenues for the group’s small subsidiary in the Republic of Ireland are not separately disclosed but are immaterial in a group context.

Contact details

Valley Road
Birkenhead,
Merseyside, CH41 7ED
UK
+44 (0) 151 653 1700
www.parkgroup.co.uk

Revenue by geography

Note: Revenues for the group’s small subsidiary in the Republic of Ireland are not separately disclosed but are immaterial in a group context.

Leadership team

Non-Executive Chairman: Laura Carstensen

Chief Executive Officer: Ian O’Doherty

Laura Carstensen became non-executive chairman on 3 June 2016, having been appointed to the board as a non-executive director on 23 September 2013. Her position as chairman was extended for three years with effect from 3 June. She is a former partner in city law firm Slaughter and May, a former member and deputy chairman of the UK Competition Commission (now the Competition and Markets Authority) and a former commissioner of the Equality and Human Rights Commission. She is the senior independent director of AJ Bell and a trustee of National Museums Liverpool.

Ian O’Doherty was appointed to the board and became CEO on 1 February 2018. He has a strong background in financial services, specifically in banking, payments and card services, having worked at MBNA for 26 years, most recently as chairman and CEO of MBNA in the UK, a position he held from 2008 to 2017. From 2015 to 2017, Ian was deputy chair of the UK Cards Association, having been a board member since 2008, and he was a member of the Interim Main Board of UK Finance (New Trade Association) from 2016 to 2017.

Chief Financial Officer: Tim Clancy

Tim Clancy was appointed to the board on 28 August 2018 and is the CFO. He is an associate of the Chartered Institute of Management Accountants and joined the group from Assurant Europe, the European subsidiary of the US-listed global insurance provider Assurant, where he was CFO. His previous roles include, from 2011 to 2013, FD of Lifestyle Services Group, an insurance administrator and outsourcing provider and, from 2009 to 2011, commercial FD of Shop Direct Group. Before then he spent over 10 years in the travel industry in many finance and general management roles including FD of Airtours and MD of Going Places.

Principal shareholders (Source: Park Group website. Data updated 10 May 2019).

(%)

Artemis Investment Management

12.9

Schroders

11.0

Miton Group

10.2

BlackRock

10.1

SFM UK Management

8.4

Janus Henderson

7.3

Unicorn Asset Management

7.1

Investec Wealth & Investment

5.1


General disclaimer and copyright

This report has been commissioned by Park Group and prepared and issued by Edison, in consideration of a fee payable by Park Group. Edison Investment Research standard fees are £49,500 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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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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New Zealand

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. 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 (i.e. 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.

United Kingdom

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Park Group and prepared and issued by Edison, in consideration of a fee payable by Park Group. Edison Investment Research standard fees are £49,500 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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