Trading for the first 11 months of the year ending 31 March 2020 (FY20) was in line with expectations until COVID-19 began to have an impact in the final weeks of the financial year and, we expect, far more significantly in the current financial year. The end-FY20 free cash balance was £30m and actions are underway to mitigate the impacts of COVID-19 while maintaining investment for medium-term digital based growth.
Companies: Appreciate Group
Appreciate expects to deliver FY20E adj. PBT in line with our estimate, despite the negative impact of COVID-19 in March. Net cash (ex trusts) was better than expected at £30m. The lockdown has hit current trade hard. Management withdrew guidance at the 31 March update and that remains the case. We take a cautious view on the pace of recovery in the corporate/consumer environment and cut FY21E PBT by 64%. We expect the business to remain net cash, meaning it can weather the storm. The longer-term growth story is intact. CY20E PE 15.6x. TP cut from 80p to 55p. Maintain Buy.
Appreciate saw trading in line with expectations until the end of February, but the closure of fulfilment locations in response to COVID-19 has seen a substantial drop in billings in the past week. Management is withdrawing its guidance, but will provide an update in the second half of April. Meanwhile, the interim dividend (£2m) will not be paid and the FY dividend will be reviewed in June (c. £4m). We see the net cash balance sheet as strong enough to weather the storm. The company’s digital first strategy will accelerate and help to mitigate the pressure on physical vouchers. We will review our estimates in April, but we think that a CY20E EV/EBIT of 3.8x on existing numbers more than reflects the downside risks.
Today's news & views, plus announcements from RDSB, IMB, POLY, SVT, WPP, SMIN, ROR, MGAM, GFRD, MRL, MBH, APP, HDD
Appreciate Group (APP, formerly Park Group) performed well during H120 and is on track to meet the company’s (and our) expectations for the year. Of greater significance, given the seasonality of the business, were the H1 operational developments and progress with the strategic business plan aimed at enhancing long-term growth by accelerating digitalisation, improving efficiency, broadening customer appeal and deepening market penetration. Management expects the benefits to show clearly from FY21. Meanwhile, the shares offer an attractive yield, with DPS well covered by earnings and supported by a debt-free balance sheet.
In these six short videos Appreciate Group CEO, Ian O'Doherty discusses the group's half year results, Appreciate’s multi-retailer redemption proposition, new offices, investing in a new technology platform, the product launch Giftli and outlook for 2020.
Billings and revenue growth: Billings increased by 10.3% to £120.2m due to H219 client wins within Corporate coming through, higher customer numbers within Consumer and earlier despatches within Christmas Savers (we estimate this timing accounts for c.3% of the overall billings growth). The revenue-to-billings ratio improved such that revenues increased by 21.3%. This followed a continued mix shifted towards the higher breakage cards/e-codes products and an increase in single-retailer billings which are generally recognised at point of sales as opposed to over the life of the voucher.
Appreciate has delivered a strong H1, in line with expectations and with some very encouraging billings trends. With H1 representing just 25% of FY billings, we make no change to our FY20E estimates at this stage.
Following continued delays of a Brexit agreement, few sectors within the UK market have remained attractive to investors despite low valuations. One sector which has continued to outperform despite the political drama has been the UK video gaming sector (henceforth UK gaming), which we are fans of. We believe a combination of sector-leading growth, strong cash conversion and timely cyclical positioning support our positive view on the UK video gaming sector.
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The recent AGM statement confirmed that trading for the first five months is in line with expectations and there has been no change to guidance issued in June. Christmas savers remains “stable” and the Corporate division has continued the growth shown in FY19.
Appreciate Group’s AGM statement says that trading in the first five months of the current financial year has been in line with management expectations and provides an update on implementation of the strategic business plan aimed at boosting medium-term growth. Shareholders also approved changing the name of the group to Appreciate Group, which the board believes will better reflect the company’s product and market position as an innovative payments, savings and rewards provider.
Park has issued a brief update stating that trading in the first five months of FY20E is in line. Trends have continued as per those outlined at the prelims in June with continued Corporate growth and Christmas savings stable.
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.
A new management team has set out a compelling strategy for longer term growth. Park dominates the UK Christmas savings market, and has strong positions in Corporate rewards.
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Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
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Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
Seneca Global Income & Growth Trust (SIGT) is managed by a four-strong team at Seneca Investment Managers, seeking undervalued securities across multiple asset classes in order to diversify the trust’s risk and return drivers. Its UK equity portfolio was particularly negatively affected by the coronavirus-led market sell-off in March, given its focus on domestic, mid-cap value stocks, which performed relatively poorly. However, these holdings could stand SIGT in good stead during an economic recovery. The trust’s board has committed to continue paying quarterly dividends, using reserves where necessary if income falls short, which seems likely given the number of dividend cuts announced by corporates in response to the global pandemic.
Companies: Seneca Global Income & Growth Trust
Burford recently released its first-ever trading statement, covering cash activity in 2019. Group-wide commitments set a new record of $1.57bn, a 24% increase. Overall deployments were almost flat compared with 2018, at £1.07bn. In both, the Sovereign Wealth Fund (SWF) and fund arrangements increased their share. It was, however, a quiet second half for realisations on-balance sheet in the core litigation finance business. 2019 profits will be lower than in 2018, with Burford indicating that net realised gains will be ca.$20m-$30m lower than in 2018 and net unrealised gains ca.$50m-$70m lower.
Companies: Burford Capital
The positive market movements (£19.5bn) offset the net outflows of £1.3bn. The adjusted operating profit before tax reached £1,149m, down 21.9% yoy. The insurer benefited less from longevity assumption changes (£126m vs. £441m in 2018) in the Heritage business and the lower Asset Management fees margin (38bp vs. 40 bp in 2018) in the Savings and Asset Management one. The current context has led to a decrease in the Solvency II ratio by 10%, but the capital position remains resilient at 166%.
Mattioli Woods has issued a trading update around the impact of the ongoing COVID-19 pandemic. We are reassured to hear that trading for the first 9m of FY20e (to Feb-20) was in line with expectations. There is likely to be a revenue impact, from falling asset prices and limits to normal business activity, however, it is not possible to quantify this just yet. A number of proactive measures are being taken to adjust the cost base to mitigate the short term impact, including reduced senior management team/variable compensation. We would highlight that c.55% of MW’s revenue is not linked to the value of client assets, providing a degree of insulation to asset prices. We make no forecast changes at this stage, but will monitor events and make any adjustments when there is greater certainty