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.
Based on unaudited data, APP expects FY20 revenues of c £118m and adjusted PBT (before non-cash impairment charges of £2–3.0m) and exceptional costs of c £0.5m) of c £11.5m. By slowing customer redemptions and deferring earnings recognition, COVID-19 reduced FY20 profitability by c £0.3m. The FY21 impact will be significantly greater, with customer activity substantially reduced (Corporate activity currently down 70% year on year and Christmas Savings orders down 10%). Despite end-FY20 free cash of c £30m (excluding customer funds held in trust), the previously declared interim DPS was cancelled, one of the steps to preserve cash while maintaining investment for medium-term growth. A decision on the final DPS will be taken with the full-year results. The board remains positive about the longer-term prospects and the benefits of the strategic growth plan but is not providing near-term guidance. As explained in this report, our forecasts are sharply reduced but allow for a gentle recovery in H221. Given the level of uncertainty, our earnings and dividend forecasts warrant a high degree of caution.
FY20 saw further progress with the strategic business plan aimed at enhancing long-term growth by accelerating digitalisation, improving efficiency, broadening customer appeal and deepening market penetration. Core functions were relocated to APP’s new fit-for-purpose HQ in central Liverpool and good progress was made with rationalising the brand architecture and implementing technology upgrades. Trials of new consumer-facing digital products, Select and Giftli, targeting currently untapped areas of the market, have enabled the design of an enhanced proposition for a full launch later this year.
COVID-19 adds uncertainty to near-term forecasting and impedes reliable anticipation of the benefits of the strategic business plan. Our modified discounted cash flow (DCF) valuation falls to 64p, which would represent 19x forecast calendar 2021 EPS. At 64p our assumed FY22 DPS represents a yield of more than 4%.