Studio Retail Group PLC

Studio Retail Group PLC (LON: STU) is a FTSE All-Share listed Company that is involved in the retailing and distribution of home shopping and education products. It operates through two digital-first value retailers, namely Studio and Findel Education. The Studio retail division offers products ranging from clothing to homewares. The Findel Education supplied educational resources to universities and school. STU has recently signed an agreement to sell its Findel Education division to West Moorland 221 Limited. The Company was founded in 1955, and presently, it delivers approximately nine million parcels annually in the United Kingdom. In the year 1962, it joined the Birmingham Stock Exchange.

On 30 June 2021, STU is due to release its FY21 results (for the 52-week period ended 26 March 2021).

Growth Prospects

• Improved Profitability: STU is likely to report a tremendous growth in adjusted PBT from continuing operations in FY21 results, with strong trading momentum. It has also strengthened its financial position by reducing core net debt to pursue upcoming market opportunities. The strong trading performance also underpinning confidence in the medium-term growth prospects.
• Disposal of Findel Education: The net cash proceeds of the Findel Education Limited division will help reduce the Group's net debt and make a voluntary payment of £9.0 million to the defined benefit pension fund. Overall, it would simplify the business and accelerate the Company's strategic vision of becoming the leading online value retailer.
• Growth Plans: Studio is progressing well to achieve its medium-term goal of £1 billion in revenue. It plans to increase the Studio's VALUE proposition to attract more customers, offers a personalised financial service proposition, and seek flexible payment options. The ongoing data analytics programme and digital transformation shall drive the growth strategy.

Risk Assessment

• Emerging Risks: After the Covid-19 pandemic, there is acute pressure on consumer disposable income levels amid inflationary market conditions. Moreover, the supply chain disruption could also increase the operating cost. There is a substantial risk to the customer base growth, which can hamper the expected growth trajectory of the business.
• Structural Changes: STU has recently appointed a new CEO, Phil Maudsley was replaced by Paul Kendrick thereafter. It has also disposed of its Findel Education business, which could have an impact over the Group revenue. Therefore, such top-level management change and business restructuring could act as a double-edged sword, and thus, risking the Company’s medium-term goals.

Now we will analyse some key fundamental and shareholders statistics of Studio Retail Group PLC. 

Recent News and Regulatory Developments

• Termination of Relationship Agreement: On 26 May 2021, STU announced that Frasers Group PLC (which held a notifiable interest in STU’s capital) no longer holds ~30% stake in the Company’s issued ordinary shares.
• Disposal: STU announced the disposal of Findel Education Limited to West Moorland 221 Limited for a gross consideration of £30.0 million.

Trading Update for the year ended 26 March 2021 (as on 19 April 2021)

• STU unveiled that adjusted PBT from continuing operations for FY21 is expected to be in the range of £48-50 million, representing a growth of 75%-83% on FY20’s adjusted profit of £27.3 million.
• The strong trading performance was driven by the Company’s main business (Studio), substantiating solid demand for the online value retail and integrated financial services.
• During Q4 FY21, product sales grew 88% year-on-year, with stronger gross margin rates.
• The total customer base also jumped 36% year-on-year to 2.5 million by Q4 FY21, which shall support future growth as well.
• At the end of FY21, STU reported £27.6 million of core net debt, considering the committed headroom of £42.4 million. With drawings under the increased securitisation facility and disposal of Education business, the Group has moved to a core net cash position.

Division wise income statement for H1 FY21 results are summarised below:

(Source: Company Presentation)

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Analysis done by Kalkine Group)

On 17 June 2021, at 8:10 AM GMT, Studio Retail Group PLC’s shares were trading at GBX 265.00, flat against the previous day closing price. Stock 52-week High and Low were GBX 319.00 and GBX 173.00, respectively.

STU’s stock price is trading nearly at the lower standard deviation of the Bollinger Bands. Meanwhile, the momentum indicator 14-day RSI (45.01) is also trading around the oversold levels. Moreover, volumes show decreasing trend along with a decrease in the price. On the technical chart, the next important support level is at GBX 217.30.

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative) 

Business Outlook Scenario

In a nutshell, STU has resiliently managed the operational challenges presented by the Covid-19 pandemic. Moreover, the sale of Findel Education shall emerge the business with a stronger financial position. In FY22, STU's improved focus and strength coupled with a significantly higher customer base are likely to deliver strong trading performance for online value retail and integrated financial services. In addition, STU can also pursue a greater range of growth opportunities with reduced net debt on the balance sheet. Building on its strong trading momentum, the Group has taken some restructuring actions to transform the business and invest actively in data analytics programmes to achieve its medium-term goal of reporting £1 billion in revenue.

Based on the strong trading momentum, robust customers base, improved financial position, enhanced digital capabilities, solid medium-term prospects, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Studio Retail Group PLC at the current market price of GBX 265.00 (as on 17 June 2021 at 8:10 AM GMT) with lower double-digit upside potential based on 1.03x EV/NTM Sales (approx.) on FY21E Sales (approx.). 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

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