Express Gifts: Customer recruitment accelerates
Online value retailer Express Gifts, which is Findel’s largest business (c 90% FY18e EBIT), continued its strong performance throughout the second half of FY17, after a promising first 16 weeks reported in January. Total sales grew by 14% for a like-for-like 52-week period (H1: 11.8%) and within this product sales were up c 16% (H1: 12%).
The customer recruitment drive that has been a focus this year has been very successful. We noted in January that the number of customers had increased by 13% to 1.56m at the end of December. Since then growth has accelerated further, with 21% growth in the last 13 weeks. This bodes very well for volumes in the coming year.
As we explained in January, new customers do not buy enough in their first three months to cover Express’s costs to recruit them ie there is a profit drag from new customers that unwinds progressively. As second half customer recruitment has stepped up, this factor has increased. The Far East product that Express has needed to invest in customer recruitment has been at less favourable US dollar exchange rates, which has had an impact on second-half margins beyond management’s original expectations.
Education: Difficulties continue
The division reports continuing difficult market conditions with like-for-like (52-week) sales declining c 4% in FY17. This indicates that the improving sales trends that were seen in the first 16 weeks of the second half to January has not continued. As we reported in January, full-year cost benefits from the major warehouse consolidation project that was completed should be c £3m.
Findel has revisited its provision in respect of past flawed financial services products. After carrying out a detailed assessment of the customer database, it is increasing its overall provision estimate from £17.7m to £29m, an exceptional charge of £11.3m. The increase replaces an earlier assumption that the profile of refunds across the main flawed products would be the same. The refund exercise is expected to be completed over the next 18 months with an approximate equal split between cash and account balance refund. Refunds to customers to date total £4.3m.
The company will also make an £8m onerous lease provision for the former head office in Hyde, which has moved to Express Gifts’ office in Accrington. Findel Education continues to occupy part of the Hyde office and new tenants are being sought for the space vacated by the head office functions.
Phil Maudsley’s appointment as CEO, having been Managing Director of Express Gifts for over 20 years, indicates where the strategic emphasis now is under the chairmanship of Ian Burke, who is moving to a conventional non-executive chairmanship. Tim Kowalski, Group Finance Director for the last seven years, is standing down with expressions of gratitude and good wishes from the Board. Pending recruitment of his successor Stuart Caldwell (previously Group Financial Controller) will serve as Acting Chief Financial Officer.
Net bank debt has reduced further since the December figure of £81.8m, and is now expected to be c £80m, which compares with £85.6m at end March 2016 and is c £5m lower than we were expecting. This is despite the higher working capital requirement that has been necessary for Express Gifts' customer recruitment drive.
Estimates: Margins drive short-term reduction only
As a result of the lower margins caused by product purchases denominated in US dollars in the second half, Findel indicates that FY17 pre-tax profit is likely to be slightly below the consensus range of pre-tax profit estimates. It defines that range as £25.5-26.0m. We were already at the bottom of that range and we are downgrading our pre-tax forecast from £25.5m to £24m.
The company continues to be watchful on input pricing in relation to foreign exchange rates, but the indication for Express at the moment is that the revenue risk is on the upside. As a result we are leaving our FY18 pre-tax forecast unchanged at £28.0m.
Exhibit 1: Changes to estimates
|
EPS (p) |
PBT (£m) |
EBITDA (£m) |
|
Old |
New |
% chg |
Old |
New |
% chg |
Old |
New |
% chg |
03/17e |
24.5 |
23.1 |
-5.7% |
25.5 |
24.0 |
-5.9% |
44.6 |
43.1 |
-3.4% |
03/18e |
26.8 |
26.8 |
0.0% |
28.0 |
28.0 |
0.0% |
48.1 |
48.1 |
0.0% |
Source: Edison Investment Research
As the company has now guided on the full year result for FY17, we refer both to FY17 and FY18 forecasts and ratings within our sum of the parts valuation (except for Education, which we already valued based on FY18e).
We are reducing our valuation from 265p to 236p, as a result of three factors:
1.
Our earnings forecast reductions described above;
2.
Reduction in the rating of our reference stock N Brown for FY17 and FY18. We use N Brown’s P/E ratio discounted by the dividend yield to reflect the absence of a dividend at Findel;
3.
Inclusion of the estimated cash effect of the financial products provision. This is estimated by the company as half the total provision of £29m. The cash element represents those customers who no longer have active accounts, to whom the company will need to make cash refunds. Other customers who have existing accounts will be offered incentives designed to increase their business and so mitigate the effect.
We do not reflect the onerous leases provision in our valuation as our forecasts already reflect actual rents payable.
The improvement of net debt from December’s £81.8m to £80m has a minor effect on our valuation.
Exhibit 2: Sum-of-the-parts valuation
£'000s |
Basis |
Metric |
Multiple |
Value |
Express (incl securitisation facility) |
NOPAT FY17 |
26,249 |
8.7 |
228,740 |
|
NOPAT FY18 |
27,709 |
9.0 |
248,949 |
|
Average |
|
|
238,844 |
Education |
Estimated FY18 EBITDA |
9,482 |
8.0 |
76,655 |
FASL |
NOPAT FY17 |
(459) |
8.7 |
(4,004) |
|
NOPAT FY18 |
(478) |
9.0 |
(4,293) |
|
Average |
|
|
(4,148) |
Enterprise value |
|
|
|
311,351 |
Core net debt |
December 2016 via Q3 trading update |
|
|
(80,000) |
Pension deficit |
Interim balance sheet 30 September 2016 |
|
|
(12,846) |
Cash provisions on financial products |
50% of provision |
|
|
(14,500) |
Equity value |
|
|
|
204,005 |
Number of shares |
|
|
|
86,443 |
SOTP value per share (p) |
|
|
|
236p |
Source: Edison Investment Research
Our valuation of 236p would equate to a P/E ratio of 10.2x for FY17e falling to 8.8x for FY18e, which is scarcely demanding.
Economic concerns remain on the impact of inflation, caused mainly by adverse exchange rates, on consumers’ disposable incomes. However, the consumer has demonstrated remarkable resilience to date, and the recently introduced Living Wage regulation is likely to have a favourable effect on disposable incomes. At the same time this and business rates increases are likely to adversely affect the cost base of terrestrial retailers. Findel is demonstrating success in growing its customer base which is encouraging to our expectations of earnings growth in the year ahead.
Exhibit 3: Financial summary
|
|
£'000s |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
March |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
|
Revenue |
|
|
491,233 |
402,200 |
406,930 |
410,601 |
459,677 |
501,363 |
Cost of Sales |
|
|
(254,481) |
(265,468) |
(215,146) |
(213,479) |
(240,972) |
(264,197) |
Gross Profit |
|
|
236,752 |
136,732 |
191,784 |
197,122 |
218,705 |
237,166 |
EBITDA |
|
|
31,999 |
43,320 |
45,136 |
41,758 |
43,101 |
48,112 |
Operating Profit (before amort. and except.) |
|
26,787 |
39,224 |
41,686 |
37,264 |
37,075 |
42,026 |
Intangible Amortisation |
|
|
(2,621) |
(2,848) |
(3,029) |
(2,348) |
(1,930) |
(2,027) |
Operating profit pre exc post intang amortisation |
24,166 |
36,376 |
38,657 |
34,916 |
35,145 |
39,999 |
Exceptionals |
|
|
(11,031) |
(16,928) |
(27,036) |
(25,458) |
(3,167) |
0 |
Other/share based payments |
|
|
(1,847) |
(1,698) |
(861) |
(239) |
(1,000) |
(1,000) |
Operating Profit |
|
|
11,288 |
17,750 |
10,760 |
9,219 |
30,978 |
38,999 |
Net Interest |
|
|
(10,523) |
(9,876) |
(10,097) |
(9,901) |
(10,131) |
(10,995) |
Financial exceptional items |
|
|
(283) |
(472) |
(136) |
(998) |
735 |
0 |
Profit Before Tax (norm) |
|
|
11,796 |
24,802 |
27,699 |
24,776 |
24,013 |
28,004 |
Profit Before Tax (FRS 3) |
|
|
482 |
7,402 |
527 |
(1,680) |
21,581 |
28,004 |
Tax |
|
|
1,103 |
(1,857) |
(5,323) |
91 |
(4,264) |
(5,881) |
Profit After Tax (norm) |
|
|
12,130 |
22,563 |
21,994 |
19,785 |
19,943 |
23,123 |
Profit After Tax (FRS 3) |
|
|
2,890 |
2,219 |
(25,261) |
(10,196) |
17,317 |
22,123 |
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
84.8 |
84.8 |
85.2 |
86.1 |
86.3 |
86.3 |
EPS - normalised (p) |
|
|
14.3 |
23.7 |
25.8 |
23.0 |
23.1 |
26.8 |
EPS - normalised and fully diluted (p) |
|
12.1 |
19.9 |
22.2 |
20.3 |
20.4 |
23.6 |
EPS - (IFRS) (p) |
|
|
3.4 |
2.6 |
(29.7) |
(11.8) |
20.1 |
25.6 |
Dividend per share (p) |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
48.2 |
34.0 |
47.1 |
48.0 |
47.6 |
47.3 |
EBITDA Margin (%) |
|
|
6.5 |
10.8 |
11.1 |
10.2 |
9.4 |
9.6 |
Operating Margin (before GW and except.) (%) |
|
5.5 |
9.8 |
10.2 |
9.1 |
8.1 |
8.4 |
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
140,839 |
133,047 |
94,428 |
92,927 |
98,706 |
99,594 |
Intangible Assets |
|
|
100,892 |
90,337 |
50,217 |
47,322 |
47,638 |
50,611 |
Tangible Assets |
|
|
31,329 |
34,644 |
35,070 |
41,423 |
43,041 |
40,955 |
Investments |
|
|
8,618 |
8,066 |
9,141 |
4,182 |
8,028 |
8,028 |
Current Assets |
|
|
327,016 |
301,960 |
328,250 |
321,279 |
335,278 |
366,950 |
Stocks |
|
|
58,896 |
64,406 |
65,405 |
53,472 |
60,669 |
66,339 |
Debtors |
|
|
210,234 |
213,284 |
224,375 |
229,848 |
263,120 |
295,418 |
Cash |
|
|
34,023 |
24,270 |
38,470 |
34,405 |
9,964 |
3,668 |
Other |
|
|
23,863 |
0 |
0 |
3,554 |
1,525 |
1,525 |
Current Liabilities |
|
|
(86,941) |
(82,861) |
(82,340) |
(76,191) |
(82,444) |
(86,879) |
Creditors |
|
|
(86,941) |
(82,861) |
(82,340) |
(75,673) |
(81,912) |
(86,347) |
Short term borrowings |
|
|
0 |
0 |
0 |
(518) |
(532) |
(532) |
Long Term Liabilities |
|
|
(280,443) |
(240,498) |
(257,628) |
(259,140) |
(263,514) |
(274,346) |
Long term borrowings |
|
|
(259,176) |
(231,223) |
(245,021) |
(250,569) |
(245,252) |
(255,252) |
Other long term liabilities |
|
|
(21,267) |
(9,275) |
(12,607) |
(8,571) |
(18,262) |
(19,094) |
Net Assets |
|
|
100,471 |
111,648 |
82,710 |
78,875 |
88,027 |
105,318 |
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
26,500 |
26,097 |
19,250 |
8,889 |
2,120 |
9,580 |
Net Interest |
|
|
(10,000) |
(9,482) |
(9,938) |
(9,549) |
(9,709) |
(10,995) |
Tax |
|
|
(1,761) |
(998) |
(1,396) |
(2,494) |
(4,000) |
(5,881) |
Capex |
|
|
(8,259) |
(11,831) |
(10,269) |
(15,940) |
(9,927) |
(9,000) |
Acquisitions/disposals |
|
|
0 |
15,461 |
1,720 |
11,115 |
2,318 |
0 |
Financing |
|
|
0 |
0 |
(500) |
0 |
0 |
0 |
Dividends |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
Net Cash Flow |
|
|
6,480 |
19,247 |
(1,133) |
(7,979) |
(19,198) |
(16,295) |
Opening net debt/(cash) |
|
|
230,659 |
226,168 |
206,953 |
206,551 |
216,682 |
235,820 |
HP finance leases initiated |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
Other |
|
|
(1,989) |
(32) |
1,535 |
(2,152) |
60 |
(0) |
Closing net debt/(cash) |
|
|
226,168 |
206,953 |
206,551 |
216,682 |
235,820 |
252,116 |
Source: Company accounts, Edison Investment Research
Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Findel and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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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Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Findel and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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. |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US |
Sydney +61 (0)2 8249 8342 Level 12, 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 245 Park Avenue, 39th Floor 10167, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
|
