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G4M’s H1 trading update confirms the continued strength of the top line sales growth already disclosed in its Q1 sales update. H1 sales have risen by an impressive 42% to £70.2m, complemented by gross margin expansion of 330bps to 28.5%, reflecting G4M’s focus on profitable sales growth. This translates to gross profit growth of £7.5m (+60%) compared with last year and will deliver interim financial results materially higher than last year. While sales momentum has continued into October, management remains mindful of the ongoing uncertainties around Covid-19 and Brexit heading into the peak trading period. With market estimates already raised on the Q1 update, this prudent caution tempers our full year PBT upgrade to 13%.
Companies: Gear4music (Holdings) PLC
The group has announced a proposed Company Voluntary Arrangement (“CVA”) in order to reduce the size of its Revolution Bar estate and rental cost base and improve profitability over the longer term. There is no impact on the Revolucion de Cuba brand. The initiative is one of several that management have introduced to counter the impact on trading of COVID-19 and will have the dual benefit of trimming the estate of underperforming sites and delivering a cash flow benefit of c.£2m p.a. The group’s balance sheet remains strong.
Companies: Revolution Bars Group Plc
REACT Group plc (REACT), the specialists in deep cleaning services for customers in the public and private sectors, has announced an encouragingly positive trading update for the financial year to September 2020 stating that the Group’s maiden profit before tax will be ahead of market expectations. Consequently we are raising our PBT forecast from £152k to £182k. Cash balances at the year-end were also higher than forecast at £1.8m and we continue to remain very positive on the prospects for the Group.
Companies: REACT Group Plc
Gear4music reports that trading has remained strong in the 1st 2 months of Q2. Back in July it said it had achieved 68% sales growth in Q1 (to 30 June) along with improved gross margins and cost efficiency, notably in marketing. Today’s update says G4M is continuing to generate improved margins alongside proportionally lower marketing costs YoY, no doubt with additional operating leverage in other cost lines too. As a result, FY21 results “will be at least in line with recently upgraded expectations”. We make no changes today, pending an H1 trading update on 22 Oct, but highlight that forecast and valuation risk is very much to the upside. Time to take a look for those that haven’t yet.
Escape Hunt announced the acquisition of its Middle East master franchise partner, Escape Hunt Entertainment LLC (“EHE”). The operation offers high potential returns at modest cost and risk to Escape Hunt. The transaction also pushes the company’s rollout ahead of our forecasts. Such acquisition opportunities, combined with attractive new lease terms and rebounding early demand, position the company for strong return potential.
Companies: Escape Hunt Plc
Pendragon was making good progress in its turnaround when COVID-19 struck but appears to be coming through the crisis in good shape to date. Despite a £44m hit to profits during lockdown, we can envisage a modest underlying profit for the full year without further shocks. Today’s IMS is supportive of this view. The group’s new strategy should help deliver a transformation in the value of the business, long-term. The potential is not reflected in the current price which is weighed down by macro worries and misplaced concerns about debt. We see the risk/reward balance as attractive.
Companies: Pendragon PLC
Q3/20 EBITDA of NOK 413m vs. Factset consensus of NOK 367m
Solid Q3/20 gross margin of 40.5%, up from 37.3% in Q3/19
LFL sales growth of 16.1% Y/Y driven by 21.1% LFL growth in Norway
We expect share price and estimates to move higher today
Companies: XXL XXLO 2XX XXL
Various Eateries listed on AIM last month, raising £25m in new growth capital. The business arguably has the strongest ever team assembled in the hospitality sector, one that is now looking to take advantage of the extraordinary conditions created by the COVID-19 pandemic. The Board includes Andy Bassadone (Ivy Collection, Côte, Bill's, My Kinda Town), Hugh Osmond (PizzaExpress, My Kinda Town, Punch Taverns), Yishay Malkov (Ivy Collection, Roka Zuma) and Oli Williams (Itsu, McDonald's), giving it the experience to acquire and successfully convert sites at pace. The group has two brands ideally positioned for the post COVID-19 environment of the 2020s, including the trend for working from home. While some of the group's ten existing locations are likely to continue to see a near-term impact from the Covid response, these measures, are by their nature, structurally increasing the size of the opportunity ahead for Various Eateries - competition for customers being further reduced, more sites becoming available at even lower rents and a larger and more distressed pool of potential acquisition opportunities being presented. As such, we believe the current backdrop has created the greatest opportunity in casual dining since the sector began to emerge in the UK in the 1990s. We see fair value for the shares at 92p.
Companies: Various Eateries Plc
Gear4music is the leading UK online retailer of musical instruments and music equipment and has established operating bases in Sweden and Germany to spearhead its expansion into mainland Europe. It operates a low-cost model, with further efficiency gains targeted, and is profitable from the first customer transaction, achieving a 250% gross margin return on its marketing investment in new customer acquisition.
Gear4music has issued a trading update for the 6 months to Sep’20, highlighting strong top line growth of 42% (N1e: 35%), which can be attributed to the CV19 lockdown and channel shift. Alongside this, the group reported a gross margin improvement of 330bps (N1e: 200bps), reflecting management’s successfully executed operational strategy outlined just over a year ago. On the back of the announcement we have upgraded our FY21 gross margin by 110bps, which leads to a pre-IFRS 16 EBITDA upgrade of 16%. While management is cautious on the revenue outlook, given the near term uncertainty, our forecasts reflect the operational outperformance. Valuation is undemanding, and intrinsic value using its peer group average rating is 1150p.
N Brown is taking crucial steps in its transition to being a pure-play online retailer (currently 77% of sales) and to strengthen its leading position in the under-serviced market for fashionable plus-size apparel. While strategic updates may be on hold until a new CEO is appointed, the company closed the loss-making portfolio of high-street stores in H119 and further brand consolidation seems inevitable. The shares trade on a low FY19e P/E of 5.5x and yield 7.2%.
Companies: BWNG BGUA NBRNF
Gear4music continued its recent run of positive news announcements yesterday with an upbeat AGM trading statement. Growth, following an exceptional first quarter in FY2021 (April to June), remained brisk in July and August. Moreover, the company’s strong sales momentum is more than matched by improvements on costs and margins.
The final results revealed adjusted PBT up 99% year-on-year, which was 10% better than forecast despite four upgrades during the financial year. This strong performance reflects the financial benefits that have accrued following the shift in the business model to online only, as well as management’s strategic decision to significantly increase marketing spend. A second special dividend for the 2020 financial year has also been announced, reflecting the strong cash flow characteristics of the business model. Our 2021 profit forecast implies continuing momentum and a year-on-year increase in PBT of 86%. We raise our target price to 1050p.
Companies: Best of the Best plc
Guild Esports is positioned to become the leading global esports brand based in the UK. With strong support from David Beckham, the company plans to pioneer the UK Premier League academy model in esports, attract leading sponsors, build a loyal fan base and establish a premium line of merchandise. Within 12 months of the IPO, Guild plans to contract 19 esports staff, register 1m fans and generate £5m sponsorship revenue, £1m merchandise revenue and £0.6m media revenue. Today, Guild announced a £3.6m three-year sponsorship deal with a new European fintech company and appears well positioned to meet its sponsorship revenue target.
Companies: Guild Esports PLC
Bowling, alongside low-cost gyms, is the strongest sub-sector of Leisure at present. Its fortunes have been revived over the last 5 years through product diversification, investment and a more family focused offering which is resonating with consumers seeking value and experiential treats. The sector is well established accounting for 3% of the family leisure market. We are attracted by its positive growth dynamics and minimal exposure to rising costs. We explore 6 themes in this note and initiate coverage on Hollywood Bowl (Buy; 250p 12m TP) and Ten Entertainment (Buy; 315p 12m TP), albeit with current year EPS forecasts 4% below consensus, reflecting recent prolonged hot weather concerns. On a 1-3 year view both have plenty of scope to further enhance shareholder value through self-help and site expansion.
Companies: Hollywood Bowl Group Plc (BOWL:LON)Ten Entertainment Group Plc (TEG:LON)