Cube Midcap Report (6 Oct 2020) – YouGov has all the right answers

Cube Midcap Report (6 Oct 2020) – YouGov has all the right answers

Good morning,

It’s Roland here with today’s Midcap Report. For the next couple of weeks, we’ll be experimenting with a new shorter format report that should be complete by 9am – please let us know what you think in the comments.

There are two companies in my sights today:

  • YouGov (YOU) – FY results
  • Watches of Switzerland Group (WOSG) – trading update

YouGov

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Market cap £1.0 billion
RNS Preliminary results
Writer disclosure No position.

This market research and analytics company has a reputation with investors for delivering growth at a hefty price.

YouGov’s share price has risen by about 600% over the last five years. Although the company has a tendency to rely heavily on adjusted earnings, these gains have been supported by real (statutory) growth, too — revenue has doubled since 2015, while operating profit rose by 580% between 2015 and 2019. Profitability has also improved – last year’s accounts showed a return on capital employed of 16%.

For fans of founder-run firms, it’s worth noting that co-founder and CEO Stephan Shakespeare retains a 6.9% shareholding, according to Stockopedia data.

YouGov’s financial year ends on 31 July, so the FY2020 results include all of the pandemic period. Let’s take a look at how the company has fared during this difficult time.

Results summary

The results summary shows solid revenue growth, but mixed performance on profits, depending on which measures you choose:

YouGov FY20 results summary

I was prepared to be charitable and accept some adjustments relating to COVID. But the company says it has “not yet seen any material impact from the COVID-19 pandemic thus far”. So it seems fair to cast a critical eye on these sizeable adjustments to earnings, which show a sharp reduction in statutory (all-inclusive) profits.

The fall in statutory profits seems to relate to two main areas.

Firstly, £6.6m of goodwill impairment charges and acquisition-related costs have been adjusted out. Last year, there weren’t any.

Secondly, operating costs rose by 14% to £107m, as the company increases spending on new services to support the next stage of its development.

I don’t have time to do a detailed analysis of this extra spending. But I don’t see a problem with companies investing to support future growth.

However, my preference is generally to rely on all-inclusive statutory profits. In my view, these reflect the ebb and flow of spending, investment and setbacks that are are part of most businesses’ growth cycles.

In this case, YouGov’s statutory profits are also a much closer match to its free cash flow:

  • Statutory net profit (2019/2020): £14.3m / £9.4m
  • Free cash flow (2019/2020): £14.8m / £9.4m

One reason for YouGov’s focus on adjusted profits may be that management incentive plans are linked to these measures. The current LTIP is based on targets which involve doubling revenue, doubling adjusted operating margins and achieving 30% compound annual adjusted EPS growth between 2019 and 2023.

My view

I think that YouGov is a successful business which most likely has a strong future. But the shares trade on 52 times FY20 adjusted earnings and 100 times statutory earnings.

Given the group’s mixed profit performance last year, I don’t feel able to judge whether the stock’s current valuation is a fair reflection of future growth potential. It’s not something I’d buy at this price, but I do suspect YouGov will continue to perform well.


Watches of Switzerland Group

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Market cap £958m
RNS Trading update
Writer disclosure No position.

Just a quick update on luxury watch retailer Watches of Switzerland, which floated on the London market in May last year. WOSG shares are up by around 20% this morning, after the company reported better-than-expected trading and upgraded its full-year guidance.

In the UK, domestic shoppers are said to be offsetting the loss of tourists, with Q2 revenue to date up by 12.6% to £145m. Ecommerce sales are up almost 50%.

In the US, Q2 sales to date are up 43% to £58m. This appears to be a significant market for the group, with strong growth potential.

Full-year revenue guidance has now been increased from £840m-£860m to £880m-£910m. That’s a healthy increase. Margins are expected to improve slightly, while net debt should be a little lower than expected.

My view

WOSG shares have now recovered from the COVID market crash and are trading at an all-time high. This prices the stock on around 18 times FY21 forecast earnings, which seems high enough to me.

Despite this, I think this could be a stock worth watching — demand for luxury goods tends to be more durable and to recover relatively quickly in a recession.


That’s all for today, thanks for reading — and as always, if you’ve found this report useful please leave a thumbs-up below to let us know.

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