Halfords Group PLC

Halfords Group PLC (HFD) is a Worcestershire, United Kingdom-headquartered retailer of motoring, cycling and leisure products and services, with leading market shares in some areas whilst also having significant headroom to grow further. Through Halfords Autocentres, it is also one of the leading independent operators in vehicle, servicing, maintenance and repairs in the country, which seeks to use technological advancements for effective delivery through investments in the most up-to-date equipment and technology. The operations of the group are differentiated in two operating segments, namely Retail and Autocentres.

Trading Update
                                                        
 (Source: Company Filings)

In the 20-week period to 16 August 2019, like-for-like revenue of the group decreased by 3.2%, with Autocentres rising by 1.1% and Retail declining by 3.9%, though online sales grew strongly at +8.4% year-on-year and B2B sales delivered strong double-digit year-on-year growth. Through improved service penetration and the introduction of new weCheck and cycle care services, service-related sales delivered positive year-on-year growth, and costs have been tightly controlled across the business. The group recorded an improved gross margin across Motoring, Cycling and Autocentres. As weaker big-ticket discretionary mainstream cycling offset strong growth in electric bikes and kids cycling and due to exceptionally warm and dry summer last year, Retail Cycling sales declined in line with expectations by 1.1%.

Financial Highlights (FY 2019, in £m)

 (Source: Company Filings)

As Autocentres revenue were £161.4 million and Retail revenue were £977.2 million, the group during the financial year 2019 reported group revenue of £1,138.6 million, which was up by 0.3% and rose by 1.1% on a like-for-like basis. Autocentres performed strongly across the year, with like-for-like sales growth of 2.6%, reflecting good growth in servicing, tyres, while due to extremely mild winter temperatures, Motoring was down by 0.4% on a like-for-like basis, and Retail performance in the year was boosted by Cycling performance and was up by 2.6% like-for-like. The company reported an increase in the Autocentres gross margin of 50 basis points to 68.0% and an increase in the Retail gross margin of 60 basis points to 48.0%, helping the company to record gross profit of £579.0 million (FY 2018: £570.2 million), which represented 50.9% of group revenue (FY 2018: 50.2%). As total operating costs before non-underlying items, increased to £516.8 million (FY 2018: £495.6 million), the group’s underlying EBITDA decreased by 10.3% to £98.2 million (FY 2018: £109.5 million) and underlying profit before tax for the year was down by 17.9% at £58.8 million (FY 2018: £71.6 million).

Share Price Commentary

Daily Chart as at 24-October-19, before the market closed (Source: Thomson Reuters)
 
On 24 October 2019, at the time of writing (before the market closed, GMT 11:47 am), HFD shares were trading at GBX 174.30, down by 1.3 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 327.20/GBX 155.40. Total outstanding market capitalisation was around GBP 351.23 million, with a dividend yield of 10.49%.

Conclusion
The company anticipates FY20 underlying profit before tax to be within the range of £50 million to £55 million, and it remains focused on improving gross margins and managing the cost base and will continue to invest in these areas in the second half actively. However, big-ticket discretionary purchases are under pressure as the uncertain economic environment remains due to ongoing risk, together with the weaker consumer confidence. Brexit can materially lower profits or lead to organisational strain due to the change in the cost of doing business or the way in which operations are run. The profitability of the company or revenue can be materially impacted by changes in the value of sterling or the British economy.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 177 (as on 23 October 2019), while we look for any upcoming catalysts in the near term.
 

NCC Group PLC

NCC Group PLC (NCC) is a Manchester, UK-headquartered cybersecurity and risk mitigation company. In the ever-evolving threat landscape, the company works with businesses to safeguard their brand and customer information by helping businesses to identify, assess, mitigate & respond to the risks they face. The company owns over 35 offices across the world and has an employee base of over 2,000 people who work as advisors for 15,000 clients. The company's operations are differentiated in two operating segments, namely Assurance and Escrow.

Financial Highlights (FY 2019, in £m)

(Source: Company Filings)

Due to encouraging growth in North America Assurance and Europe & RoW, Assurance revenues increased by 9.7% to £212.7 million (FY 2018: £193.9 million), leading to an increase of 7.6% in revenue for the year to £250.7 million. Due to a decline in the UK by 6.5%, Escrow revenue declined by 2.8% to £38.0 million and accounted for 15.2% of total revenues. Gross profit rose by 6.2% to £101.8 million (FY 2018: £95.9 million) with gross margin reported at 40.6% (FY 2018: 41.2%), while operating profit increased by 44.4% to £19.5 million (FY 2018: £13.5 million) and adjusted operating profit rose by 9.4% to £33.7 million (FY 2018: £30.8 million). Adjusted EBITDA rose to £43.7 million with adjusted EBITDA margin declined to 17.4%. Statutory profit before taxation grew by 52.1% to £17.8 million and adjusted profit before taxation rose by 9.2% to £32.0 million (FY 2018: £29.3 million). Adjusted basic earnings per share increased by 12.2% to 9.2p and statutory basic earnings per share rose to 4.9p (FY 2018: 4.4p). The company proposed a final dividend of 3.15p per share (FY 2018: 3.15p), helping it to maintain total dividend for the year to 4.65p per share (FY 2018: 4.65p).

Share Price Commentary
 
Daily Chart as at 24-October-19, before the market closed (Source: Thomson Reuters)
 
On 24 October 2019, at the time of writing (before the market closed, GMT 10:30 am), NCC shares were trading at GBX 183.40, down by 0.64 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 202.77/GBX 111.48. The company's stock beta was 0.52, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around GBP 512.26 million, with a dividend yield of 2.51%.

Conclusion
As part of the three-year transformation programme, the company intends to return all parts of its assurance segment to double-digit growth in the year ahead and reported that the restructuring programme was progressing on time and within budget to build a strong platform for future scalable growth and margin improvement.The strategic importance and value of cyber security in the target markets continue to increase due to regulatory pressure and high-profile breaches. The company was successful in reducing its net debt to GBP 20.2m, with gearing equating to 8.7% (FY 2018: 11.9%), reflecting strong financial position with effective cash management as cash conversion increased to 109.6%. However, theEU General Data Protection Regulation (GDPR) poses a significant risk from attacks specifically designed to disrupt the business, which can impact the perception of the group in the market. Moreover, the company faces risk from Brexit as it might result in a reduction in demand due to an economic slowdown.

Keeping in mind the uncertainty faced by the company from global and domestic economic headwinds, investors are recommended to“HOLD” the stock at the current price of GBX 183.40 as on 24-October-19, while we look for any upcoming catalysts.

*Peers of the company are Keywords Studios PLC, Paradox Interactive AB (publ), Ricardo PLC, iomart group PLC, GB Group PLC and Frontier Developments PLC.
*All forecasted figures and peers have been taken from Thomson Reuters.

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