Park Group FY12 results

Transcription

1 Park Group FY12 results Strong flexecard progress Financial services PBT, adjusted for the non-cash amortisation of acquired customer lists, was 7% ahead of our forecast ( 9.3m vs 8.7m forecast) and ahead by 27% y-o-y. The gross margin was stronger than we had forecast. The flexecash prepaid card continues to grow well, winning new customers with new products and displacing paper vouchers. We expect flexecash to continue to drive the growth in business with its web-enabled functionality and enhanced customer experience, broader customer reach, and lower operational cost. Cash flow remains strong, supporting a larger than expected increase in the dividend by 18% to 2.0p per share. Year end Billings ( m) PBT* ( m) EPS* (p) DPS (p) P/E (x) Yield (%) 03/ / /13e /14e Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items. 2 July 2012 Price 46.50p Market cap 78m Shares in issue 168.0m Free float 31% Code PKG Primary exchange AIM Other exchanges N/A Share price performance Financial service Park s core business is to sell prepaid cards and gift vouchers through its Corporate, Consumer, and Internet distribution channels. Online sales are now in excess of 100m and growing quickly. Internet use improves customer service, lowers cost and improves access to market. The flexecash prepaid card is developing quickly and adding to the transformation of the group. flexecash is proving itself 1.7m flexecash prepaid cards have been issued since launch in June 2010, and 77m of value has been loaded onto these ( 56m in FY12 vs 18m in FY11). Flexecash is driving good growth across all distribution channels consumer, corporate and online because it is convenient for customers to use, has attractive functionality especially when combined with mobile and web-based applications, and is secure. Growth to date has largely been incremental, but there are also signs of displacement of paper vouchers. For the group, cards extend the target market by product and geography, and are less costly to administer. Cash generative and debt free Park has a debt-free balance sheet and is cash generative, supporting a progressive dividend policy. We believe that the organic growth opportunities available to the group make significant acquisitions unlikely. Valuation: Growth prospects undervalued Our DCF valuation is 58p per share and we consider a 12.6x calendar 2012 P/E ratio to be fair, equivalent to 54p per share. The average of these is 56p. Our earnings estimates would benefit from any increase in interest rates. % 1m 3m 12m Abs (3.9) (5.8) 1.1 Rel (local) (6.9) (2.7) week high/low 57.25p 39.63p Business description Park Group (PKG) is a financial services business. It is one of the UK s leading multiretailer voucher and prepaid gift card businesses, focused on the corporate gift and Christmas savings markets. Sales are generated through agents, a direct sales force and the internet. Next events September 2012 December 2012 Analysts AGM Interims Martyn King +44(0) Jonathan Goslin +44(0) financials@edisoninvestmentresearch.co.uk Edison profile page Park Group is a research client of Edison Investment Research Limited

2 Strong flexecash progress In a tough economic environment Park has grown its top line (billings) by 11% and PBT adjusted for the non-cash amortisation of acquired customer lists by 27% (7% ahead of our forecast). Park s focus in recent years on harnessing the internet to target customers, service them, and distribute its products is helping to drive this growth, along with the flexecash prepaid card introduced in June Flexecash is producing more business from existing customers, winning new customers, and enhancing the customer experience. It also allows Park to target new customers, with new products, in different geographies, with less administrative cost. Cash flow remains strong, supporting a larger than expected increase in the dividend by 18% to 2.0p per share. Park has a debt free balance sheet and is cash generative, supporting a progressive dividend policy. We believe that the organic growth opportunities available to the group make significant acquisitions unlikely. Growth: Billings or revenue? The group s prepaid card, flexecash, is driving good growth across all distribution channels consumer, corporate and online. Since launch in June 2010, flexecash has issued 1.7m cards and 77m of value has been loaded onto these ( 56m in FY12 vs 18m in FY11). Card billings are now around 28% of all Corporate division billings and around 8% in the Consumer division. More than 600 Corporate division customers are using flexecash, which is now accepted by 38 retail brands (with c 15,000 retail outlets); a further 11 retailers including Marks and Spencer are in the process of adoption. An interesting feature of flexecash is that FSA authorisation is portable across the EU and can therefore be used by Park s Irish business and, in time, in other European markets. Because the accounting treatment for the recognition of revenue from prepaid cards is different from that for vouchers, we believe that billings (a measure that includes the amount of value loaded onto cards during the period) are a better way to track business progress while flexecash is growing strongly. For the year, billings increased by 11% while reported revenue was flat and we expect a similar pattern going forward. Voucher revenue is recorded when the voucher is sold (not redeemed), with gross margin reflecting the size of the retailer discount provided to Park. Prepaid card sales (with identifiable prepay customers, unlike vouchers) are to be recorded in revenues at the level of gross margin and as the customer balances are actually spent. Our analysis of the overall gross margin suggests that 100 of overall prepaid card customer spending will thus result in 6-7 of revenue and gross profit, whereas 100 of vouchers issued would result in a similar gross profit but be recorded immediately in revenue of 100. The accounting treatment change has a material impact on reported revenue growth and gross margin, but has no material impact on reported gross profits, other than some deferral during the period when customer card balances are not yet spent. We believe there was c 1m of deferred income at year end FY12 and as flexecash takes a larger share of group business the deferred profits will have a tendency to increase, making reported profits increasingly conservative. 2

3 Exhibit 1: Billings and revenue Year to 31 March Change Customer billings Consumer 173, ,193 8% Corporate 123, ,772 15% 297, ,965 11% Revenue Consumer 168, ,286 3% Corporate 111, ,739-6% 279, ,025 0% Source: Park Group Exhibit 2: Billings by market Year to 31 March Change Corporate Incentive 72,465 80,319 11% Credit 39,448 47,357 20% Other corporate 11,807 14,096 19% Total billings 123, ,772 15% Consumer Christmas savings 161, ,112 7% hsv.com 8,470 10,705 26% Other consumer 3,488 3,376-3% Total consumer 11,958 14,081 18% Source: Park Group Corporate In the Corporate division Park sells own brand vouchers and prepaid cards, as well as individual store vouchers, to corporate customers, who use them for customer or employee incentive schemes and for sale to consumers (eg within the home collected credit market or other Christmas savings operators). Billings increased by c 15% in FY12 on the back of an 8% increase in customer numbers to 6,100. Operating profit grew 24%, supported by improved margins. Product development, utilising the flexibility of the flexecash card, continues. During FY12, Park introduced flexebens (an employer-operated salary deduction accumulation scheme that adds value with a bonus) and flexesave (whereby staff or customers participate in a Christmas savings scheme with added bonus). Mobile applications have been launched for flexecash. For example, customers can enter their location post code and find out where in the area they can use flexecash. It will soon be possible to view special (retailer) offers by mobile phone and also load additional value onto the card. During FY13 flexecodes has been launched, which extends the multi-retailer offering to online transmission via . Ongoing electronic top-up is secure and immediate for the customer, and cost effective for Park, eliminating postage and handling costs. More importantly, we expect these developments to open new markets that have hitherto been difficult for Park to penetrate. Park says it is discussing a number of interesting new corporate contracts and it has also formed a joint venture with the team of individuals who were previously behind the development of the Argos business-to-business activity; it may provide white labelled cards or vouchers to third-party business as an example. 3

4 Exhibit 3: Corporate division estimates Year to Mar-09 Mar-10 Mar-11 Mar-12 Mar-13e Mar-14e Billings 85, , , , , ,839 % change 4.2% 26.0% 15.4% 14.6% 12.0% 12.0% Revenue ( '000s) 85, , , , , ,402 % change 4.2% 26.0% 4.0% (6.1%) (1.4%) 5.0% Inter-segment revenue 132, , , , , ,000 Customer revenue 217, , , , , ,402 % change 18.7% 6.4% 7.0% -0.8% (5.1%) 2.2% Operating expenses ( '000s) (82,234) (104,005) (107,588) (99,874) (97,867) (102,440) % change 5.2% 26.5% 3.4% (7.2%) (2.0%) 4.7% Operating profit ( '000s) 2,821 3,198 3,934 4,865 5,368 5,962 % of revenue 3.3% 3.0% 3.5% 4.6% 5.2% 5.5% % of billings 3.3% 3.0% 3.2% 3.4% 3.4% 3.4% Customer base ('000s) 4,354 5,200 5,600 6,100 Source: Park Group/Edison Investment Research Our Corporate division forecasts include continuing low double-digit billings growth. Consumer In the Consumer division the main activity is Christmas savings, where customers purchase vouchers, prepaid cards, hampers, or other gift products on a prepaid instalment plan of up to 45 weeks for product delivery in time for Christmas. High Street Vouchers or hsv.com, the direct to consumer operation, is still relatively small in billing terms (see Exhibit 3), but growing fast with margins supported by lower distribution costs from its internet only proposition. The FY12 financial results for Christmas savings have been very predictable since early in calendar 2011, once agent and customer numbers and order levels for the following Christmas (2011) were established. These all grew, producing a c 7% increase in Christmas savings billings. hsv.com grew billings by c 26%. Divisional margin was lower as anticipated, largely because of a decline in the peripheral revenues (of c 0.5m to c 0.5m) generated from third-parties for use of the group s packaging and cold storage facilities during off-peak periods. The residual margin impact reflected a lower share of (higher-margin) hampers in the order book. 4

5 Exhibit 4: Consumer division estimates Year to Mar-09 Mar-10 Mar-11 Mar-12 Mar-13e Mar-14e Billings 165, , , , , ,687 % change 15.4% (5.7%) 11.5% 7.6% 6.1% 6.1% Revenue 165, , , , , ,487 Inter-segment revenue Customer revenue ( '000s) 165, , , , , ,487 % change 15.4% (5.7%) 8.0% 3.5% 2.8% 4.0% Operating expenses ( '000s) (163,480) (153,178) (163,946) (170,148) (174,662) (181,452) % change 14.4% (6.3%) 7.0% 3.8% 2.7% 3.9% Operating profit ( '000s) 2,006 2,805 4,470 4,138 4,570 5,035 % of revenue 1.21% 1.80% 2.65% 2.37% 2.55% 2.70% % of billings 1.21% 1.80% 2.57% 2.21% 2.30% 2.39% Number of agents ('000s) % change 9.6% 6.3% 0.9% 5.0% 3.0% 3.0% Customers per agent % change (0.9%) (12.9%) 1.6% (1.5%) 0.0% 0.0% Order book ( '000s) % change 14.7% (7.2%) 9.2% 7.3% 6.1% 6.1% Number of customers ('000s) % change 8.5% (7.4%) 2.5% 3.4% 3.0% 3.0% Average order value ( ) % change 5.7% 6.6% 0.2% 3.7% 3.0% 3.0% Source: Park Group, Edison Investment Research Indications for Christmas 2012 are for around 6% top-line growth, reflected in our forecasts. We also assume some increase in margins from continued growth in direct distribution and a better contribution from the peripheral activities. Forecast adjustments and financials Park beat our FY12 adjusted PBT forecasts by c 7%. Although billings were in line with our forecast, gross profit was higher, partly offset by higher administration expenses and amortisation of acquired intangibles. Our FY13e is increased by c 4%, which allows for the higher starting point, but also allows for some further earnings deferral due to the accounting treatment of the faster than previously forecast flexecash growth. The FY12 balance sheet contains no debt and 56m of cash balances, of which c 47m is client balances held in trust. The historic accounting negative equity position continues to erode with retained earnings, further reinforcing the overall position of balance sheet strength. 5

6 Exhibit 5: Forecast change Billings ( '000s) PBT ( '000s) EPS (p) DPS (p) Actual Forecast Change Actual Forecast Change Actual Forecast Change Actual Forecast Change 03/12 328, , % 9,316 8, % % % Forecast New Old Change New Old Change New Old Change New Old Change 03/13e 357, , % 10,167 9, % % % 03/14e 388,526 N/A N/A 11,084 N/A N/A 4.75 N/A N/A 2.30 N/A N/A Source: Park Group, Edison Investment Research Valuation The lack of comparable quoted peers makes it more difficult to value Park. DCF Our DCF valuation gives a value of 58p per share (slightly reduced from 60p by pushing out our anticipation of a future increase in interest rates by a year). We have adjusted the usual DCF formula (which excludes interest earnings) to include interest earned on segregated customer cash balances (but not on the group cash balance), as this is an integral part of the return. We have grown our FY14 forecasts at 15% for three years, dropping to 5% until FY22, enhanced by a gradual rise in interest rates to 3% between FY15 and FY17. We have valued the terminal cash flow at 10x, and discounted by 12%. Earnings The diversified financial sector offers too wide a range of P/Es and business models to be a useful guide. Looking at Park s traditional business, particularly in its Consumer division, we would expect a premium rating to a lending business (lending businesses have credit risk) with a degree of socioeconomic overlap. With Provident Financial on around 11.6x 2012e earnings, we would expect 12.6x for Park. On 12.6x our calendar 2012 fair value estimate is 54p. We would also note that Park is potentially in the midst of a transformation as it quickly increases its use of online distribution and rolls out flexecash, which would make historic comparisons too conservative. We expect 15% compound EPS growth during our forecast period and further success with the application of flexecash could easily produce an extended period of growth supported by solid cash-flow, which would be an attractive combination for investors. In such a situation, the current low liquidity in the shares could work to support the valuation. 6

7 Exhibit 6: Financial summary Year end 31 March e 2014e PROFIT & LOSS IFRS IFRS IFRS IFRS IFRS IFRS Billings 250, , , , , ,526 Revenue 250, , , , , ,889 Cost of sales (235,535) (246,752) (259,819) (257,283) (259,066) (269,650) Gross margin 15,006 16,434 20,119 21,742 23,402 25,239 Distribution costs (2,479) (2,518) (2,548) (2,638) (2,680) (2,720) Administrative expenses (8,454) (8,712) (10,810) (10,420) (11,254) (12,154) EBITDA 4,073 5,204 6,761 8,684 9,468 10,365 Depreciation & amortisation (754) (642) (812) (1,091) (1,251) (1,401) Amortisation of acquired intangible and goodwill impairment (155) (203) (165) (484) (350) (250) Share-based payments (41) (40) (165) (250) (250) (250) Exceptional operating income 0 0 5, Operating profit 3,123 4,319 11,125 6,859 7,617 8,464 Operating profit (normalised) 3,319 4,562 5,949 7,593 8,217 8,964 Net Interest 3, ,382 1,723 1,950 2,119 Profit Before Tax (norm) 6,439 5,517 7,331 9,316 10,167 11,084 Profit before tax (FRS 3) 6,243 5,274 12,507 8,582 9,567 10,584 Tax (2,221) (1,734) (2,993) (2,066) (2,392) (2,646) Profit after tax (norm) 4,148 3,703 5,352 6,943 7,625 8,313 Profit after tax (FRS3) - continuing operations 4,022 3,540 9,514 6,516 7,175 7,938 Discontinued operations Profit after tax (FRS3) 4,022 3,540 9,514 6,516 7,175 7,938 Average Number of Shares Outstanding (m) Fully diluted EPS - continuing operations (p) Fully diluted EPS - FRS 3 (p) EPS - normalised fully diluted (p) Dividend per share (p) Gross margin (%) EBITDA margin (%) Operating margin (before GW and except) (%) BALANCE SHEET Fixed assets 7,763 9,531 16,606 15,573 14,842 14,666 Intangible assets 3,198 4,919 5,926 5,660 5,583 5,633 Tangible assets 4,342 4,127 9,135 9,277 9,257 9,031 Other , Current assets 34,442 43,440 54,327 65,290 73,376 82,277 Debtors 5,727 6,504 7,912 9,197 9,942 10,808 Cash held in trust 16,508 21,457 39,607 46,882 52,535 58,862 Cash available to group 12,207 15,479 6,808 9,211 10,900 12,607 Current liabilities (69,750) (78,520) (88,252) (94,658) (99,034) (103,584) Creditors (69,750) (78,520) (88,252) (94,658) (99,034) (103,584) Short-term borrowings Long-term liabilities (1,067) (3,849) (2,141) (1,905) (1,609) (1,609) Long-term borrowings Deferred tax (20) (21) 0 0 Retirement benefit obligation (1,067) (3,849) (2,121) (1,884) (1,609) (1,609) Net assets (28,612) (29,398) (19,460) (15,700) (12,424) (8,250) CASH FLOW Operating cash flow 6,982 8,782 (485) 6,180 7,172 7,447 Net interest 3, ,693 1,950 2,119 Tax (56) (1,193) (1,347) (1,774) (2,392) (2,646) Capex (1,291) (2,351) (6,992) (1,451) (1,554) (1,474) Acquisitions/disposals Financing Dividends (1,981) (2,905) (1,453) (2,856) (3,487) (3,739) Other (25) Net cash flow 6,777 3,272 (8,671) 2,403 1,689 1,707 Opening net (debt)/cash 5,430 12,207 15,479 6,808 9,211 10,900 Closing net (debt)/cash 12,207 15,479 6,808 9,211 10,900 12,607 Source: Edison Investment Research EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. 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