Investors have become used to a strong top-line performance by Ted Baker, but recent interim results show that the company is also delivering margin expansion and solid cash generation. This is a result of a sound investment and expansion strategy as well as good management, and should give investors increased confidence in consensus forecasts. Growth opportunities remain (particularly in Asia) but the company is not immune from the macro-economic and geopolitical headwinds that affect the sector.
Written by
Richard Lewis Jones
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12 October 2017 |
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Investors have become used to a strong top-line performance by Ted Baker, but recent interim results show that the company is also delivering margin expansion and solid cash generation. This is a result of a sound investment and expansion strategy as well as good management, and should give investors increased confidence in consensus forecasts. Growth opportunities remain (particularly in Asia) but the company is not immune from the macro-economic and geopolitical headwinds that affect the sector.
Firing on all cylinders
Interim results showed a healthy top line that is firing on all three cylinders; at constant FX retail was up 9.2%, driven principally by e-commerce (up 40.7%), wholesale (up 10.2%) and licensing (up 23%) and impressive given the many headwinds facing all premium and luxury brands. A balanced multi-channel approach is generating profitable growth (EBIT margin up 20 basis points to 8.6%, PBT up 12.7%, net cash flow almost double that of last year) and increasing confidence. A point of concern for us is the 14% increase in administrative costs due to an expansion of “central functions”; however, we note the company’s sensible decision not to exercise an option to expand its London headquarters.
Confidence in the business model
Despite the usual comments about challenges and headwinds, particularly in the US (also mentioned by LVMH in its Q3 results), Ted Baker is managing to execute on its strategy and deliver consistently strong results. Although there are challenges (for example retail sales densities are down slightly in the UK and Europe, and North America), investment in digital (now 20% of retail sales) is paying off and a very commercial approach to wholesale and licensing is a good counterbalance to an unpredictable retail environment. A robust balance sheet provides support and credit facilities have increased from £110m to £135m. Net debt stands at £67.4m.
Valuation
Consensus estimates for the full year (ending 31 January 2018) look well supported by the interim results and may well now begin to tick upwards. An increased EBIT margin and stronger cash inflow may give confidence that higher profitability is sustainable. According to Bloomberg estimates, the shares trade on a discount to the luxury sector (22.2x versus an average of 25.6x), but that gap may look unjustified given the consistency with which Ted Baker produces strong results and signs of improved margins.
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Consensus estimates
Source: Bloomberg, company reports |
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Disclaimer
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Disclaimer
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NetScientific’s healthcare portfolio progressed towards revenue generation during H117 with the soft launch of both Vortex and ProAxsis products into the research market. A series of value inflection points are expected in H217 and FY18 including Series A financings for all five holdings, the commercial ramp of ProAxsis’s NEATstik following the recent CE mark approval, and targeting home health providers, payers, hospitals, and accountable care organisations to increase commercialisation of the Wanda platform. We value NetScientific at £57.3m or 83p per share.