Cube Report (29 June 2021) – No Christmas cheer for Appreciate
Good morning, it’s Roland here with today’s Cube Report.
It’s a fairly quiet time for midcap news as we approach the end of the month (and half year). So in a slight change to our normal programming, I’m going to look at one of the biggest fallers in the market this morning, small-cap Appreciate Group (APP).
This gift voucher/savings club firm has published solid full-year results today, but is warning of a disappointing outlook for Christmas savings. Should shareholders be alarmed, or is this hangover from the pandemic a potential buying opportunity?
- Stock data should display here.
|Writer disclosure||No position|
Appreciate Group’s main consumer brands are Park Christmas Savings, Highstreetvouchers.com and Love2shop. The company also has a corporate gift card business and has been involved in running the free school meals initiative during lockdown periods.
The consumer and corporate businesses each generate approximately half the group’s billings and revenue.
Appreciate’s operations have been affected by the pandemic, as customers’ spending and saving patterns were affected by lockdown. Store closures, for example, have meant reduced voucher redemptions.
The headline results for the year to 31 March do not look too bad to me, if you are prepared to accept that exceptional costs last year were truly exceptional. Let’s take a look.
- Revenue down 5.2% to £106.8m
- Billings down 3.2% to £406.5m
- Digital billings up 288% to £68.5m
- Pre-tax profit down 83% to £1.3m
- Year-end unrestricted net cash £31.4m (FY20: £29.6m)
- Full-year dividend: 1p
Profit: At first glance it looks like Appreciate’s revenue and billings held up fairly well last year, but profits collapsed. So I’ll start by taking a look at the moving parts here.
- Statutory pre-tax profit: £1.3m
- Exceptional items: £1.1m (redundancy, goodwill and stock impairments and profit on sales of assets)
- Pre-tax profit excluding exceptional items: £2.3m
- Unaudited non-recurring losses relating to the closure of the hamper packing business, head office move and exit from FMI brand agency: £1.9m
- Pro-forma adjusted pre-tax profit: £4.2m
Is my estimated pro-forma figure a more realistic view of the underlying profitability of Appreciate’s business? I’m wary about the risk of more redundancy and impairment charges, as we saw these in FY20 too. But on balance, I think it’s probably fair to say that the underlying profitability of the group’s continuing operations last year was closer to £4.2m than £1.3m.
For context, I can see that net cash from operating activities was £4.7m last year, but this was entirely swallowed up by £5.2m of spending on intangible assets — Appreciate has been investing in its digital operations. Net cash rose last year because the company also received £3.1m from the sale of various assets. This resulted in a free cash inflow of £2.1m.
Results summary: Appreciate’s performance has been disrupted by both the pandemic and the group’s own restructuring, which was underway before Covid-19. But as operating conditions normalise and shops (most likely) remain permanently open again, I think it’s fair to expect Appreciate’s performance to improve over the next 18 months.
Unfortunately, the company’s commentary indicates recovery may now be slightly slower than expected, hence today’s share price drop.
Outlook: The Park Christmas Savings business allows people to save through the year and then receive vouchers to spend at Christmas. The pandemic has led to an unusual quirk in performance — people didn’t spend all of their vouchers last year.
In April, Appreciate said that unspent Christmas vouchers were £6.4m higher than the previous year, and the customers were holding these over to Christmas 2021. As a result, this year’s Christmas order book was expected to be 11% lower than in 2020 (when it fell by 8%).
In today’s results, this forecast has been downgraded. The Christmas order book is now expected to be c.14% lower than last year.
The remainder of the outlook for the year ahead appears to remain unchanged, with a stable performance from the corporate business.
Christmas savings appear to account for the bulk of the consumer business. The company’s base case modelling for the year ahead includes a Christmas savers order book of £170m. Given that consumer billings are running at around £200m, it seems this is still how the bulk of consumers interact with Appreciate.
However, this could change. I’m impressed by the near-fourfold increase in digital billings last year. Appreciate says that direct traffic to the highstreetvouchers.com website rose by 31.8% during the six months to 31 March, with conversion rates (i.e. the % of visitors who buy a voucher) up to 4.7% from 3.5% during the prior year period. Although the pandemic obviously gave a boost to online shopping, I wouldn’t be surprised to see this trend continue.
Similarly, the growth of the corporate business is reassuring. Corporate billings have now risen from £180m in 2018 to £201m last year. The trend for companies to reward staff with digital shopping vouchers appears to have been established before Covid-19, so I don’t see why it shouldn’t continue.
Would I buy Appreciate? There are a lot of moving parts in today’s results. When combined with continuing investment in digital growth, I think it’s hard to be certain whether Appreciate will retain the characteristics that have made it attractive (to me) previously — high ROCE and strong cash generation.
There’s also the broader question of whether this is a business that’s in danger of obsolescence.
However, consensus forecasts before today suggested that Appreciate’s adjusted pre-tax profit would rise to £7.6m in 2021/22.
After today’s fall, I estimate that the shares are trading on around 11 times consensus earnings forecasts for FY22. If we adjust this multiple to exclude net cash, this multiple falls to less than six times forecast earnings.
Consensus forecasts suggest a dividend payout of 1.7p per share this year, which would give a useful 4.9% yield.
On balance, I think Appreciate shares are probably cheap enough to price in plenty of bad news. In my view, this stock could be a genuine value opportunity at current levels. I’d want to do more research before hitting the button, but I am tempted.
That’s all for today, apologies for the slightly late finish. As always, I’d welcome your thoughts on Appreciate or your feedback on this piece through the thumbs up.