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.
Billings grew in both the Corporate and Consumer businesses versus H119 and strong growth in card/digital product improved margins. The seasonal pre-tax loss reduced to £1.3m (H119: £1.5m) including c £1m of net strategic investment plan costs. Around 85% of revenues are typically generated in H2, and all of the profits. Group cash flow was affected by the timing of transfers from customer funds held in trust, but total cash balances remained strong at £213m. DPS was held at 1.05p as expected, marking a pause in the progressive dividend policy as APP steps up investment and implements its growth plans. There are no material changes to our earnings estimates. Slower release of operating cash flow from the product mix shift to cards/digital has already been captured by our DCF valuation.
APP has relocated to its new fit-for-purpose HQ and has adopted its new corporate name, better reflecting the product offering and group aspirations. It has also made good progress on rationalising its brand architecture and implementing technology upgrades, and trials have commenced on the new consumer-facing digital product, Giftli, that will target currently untapped areas of the market with a focus on a millennial customer base. A soft launch is expected before Christmas ahead of a full launch in the new year. Management continues to expect the full-year net investment costs related to the implementation of the strategic business plan to be c £2.0m, with P&L benefits of £2–5m pa after FY21.
Our modified DCF valuation is reduced slightly from 90p to 87p. With near-term earnings suppressed by investment spend, the implied CY20e P/E at 90p is 18.0x and CY21e 16.0x, which we believe is reasonable, especially given the prospect of accelerated growth from FY21.