In a trading update, management says FY19 trading exceeded its expectations, driven by Corporate business, and it expects similar trends in the current year. Reported profitability in FY19 and FY20 will be negatively affected by costs associated with implementing the strategic business plan, with little of the benefit expected until FY21 and beyond, and also IFRS 15 effects. We expect management to provide more details of the potential for enhanced growth and efficiency with the full-year results.
Park says the strong trading performance was driven by the Corporate business, with the Consumer business ‘broadly stable’ and growth particularly strong in higher-margin cards. IFRS 15 will defer some of the profitability benefit to future reporting periods and, including higher strategic planning costs, FY19 PBT before an exceptional £1.25m non-cash property write-down related to the head office move will be slightly below market consensus. In FY20 the strategic investment cost will have a net £2.0m impact before the net benefits emerge from FY21. Park has a debt-free balance sheet and cash-generative business model to support this investment phase, and our DPS forecasts are unchanged. Our FY19 PBT forecast (before the FY19 exceptional charge) reduces to £12.5m (was £12.8m) and FY20 to £11.7m (was £14.3m).
The strategic business plan that the new management team presented in December highlights the strong market potential in multi-retailer redemption products, led by card and digital formats, and the strengths of Park’s existing offering. Park will accelerate the investment in digital enablement, the driver of its growth in past 10 years, to capture more of this market potential while increasing efficiency through streamlining and simplification of products and processes. Using that same technological and product capability, Park plans a new product to further penetrate the consumer market, a £2bn+ market opportunity where its current penetration is minimal compared with its dominant position in the Christmas savings market and strong position in the business sector.
For now we leave our fair value, based on a modified DCF and P/E relative comparison, unchanged at 87p (see page 3 for more details). Near-term earnings will be held back by strategic investment cost, but the goal is faster medium-term growth. Meanwhile, the attractive dividend yield is well covered by earnings.