Connect Group Plc - Operating in a volatile trading environment

Connect Group Plc (LON: CNCT) is a Swindon, United Kingdom-headquartered specialist distributor. The operations of the Company are differentiated in two core operating segments, namely Smiths News and DMD.

 On 27 January 2021, the Company will hold the Annual General Meeting.

Rationale for Valuation – Avoid at GBX 23.00

• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company’s profitability margins have consistently fallen over the past three periods.
• From the technical standpoint, 14-day RSI stood at 83.18 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The Company has been facing a challenging market condition from the perspective of governments, investors, competition, and volatile stock markets.
• Failing to attract, engage and retain talent within high performance and values-based culture.
• Moreover, the negative market movements due to the Covid-19 disruption has been impacting the value of assets under administration.
• The next phase of lockdown due to the second wave of COVID-19 outbreak could result in lower demand, a shortage of labour and shut down of operations.

Post-Close Trading Update (as on 1 October 2020)

• In Smiths News, trading in the last quarter of 2020 was stronger than the management's revised anticipations.
• During the fourth quarter of 2020, trading EBITDA stood at £10 million, with a robust cash generation.
• For FY20, the Company expects to deliver Adjusted EBITDA (pre-IFRS16 lease adjustment) in the range of £38.5-£39.0 million.
• In Q4 FY20, the run rate performance in Adjusted EBITDA was in line with the management's expectations.
• At the FY20 year-end, the net debt is expected to be approximately 2X EBITDA.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The post-trading update was ahead of expectations. The Company witnessed positive momentum in Q1 FY21. The Company has a resilient client proposition and business model. Despite the resilient business performance, CNCT operates in volatile market conditions, which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The Covid-19 has resulted in increased volatility and reduced liquidity, which has impacted the company’s share price. The stock made a 52-week low and high of GBX 11.05 and GBX 38.90, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Connect Group at the closing price of GBX 23.00 (as on 9 October 2020).

Appreciate Group Plc – Decent start to the new financial year

Appreciate Group Plc (LON: APP) is a United Kingdom-based gifting and engagement company. It operates prepaid gift card, gift voucher, and financial service business. The operations of the Company are differentiated in two core operating segments, namely consumer and corporate.

On 24 November 2020, the Company will announce the interim results of 2020.

Rationale for Valuation – Avoid at GBX 26.50

• Reported profitability metrics for the financial year 2020 were lower against the industry median, reflecting lower revenue generated and better control over expenses as compared to the industry. In FY20, the net margin stood at 4.9%.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The stock has underperformed the index (FTSE AIM All-Share) during the last one-year period and delivered a negative return of 50% in the last year.
• From the technical standpoint, the 50-day simple moving average price is currently at GBX 44.24, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company’s returns are negatively impacted by the adverse market movements due to covid-19 crisis.
• APP’s business continuity may be impacted by cyber-attack, natural disaster, infrastructure damage or other external factors.
• Due to market weakness, the Company may see a decline in investments value,
• Disruption to the banking system would adversely impact the Company’s ability to collect payments from customers and could adversely affect the APP’s cash position.

Trading Update (as on 29 September 2020)

(Source: Company Website)

• Since the start of the new financial year, the Company has shown an improvement in trading, with billings for the month to date were 10% higher than the corresponding period of 2019.
• The Company also witnessed an improvement in redemption rates.
• Total billings remained slightly ahead of the mid-range scenario, with a £23.9 million of free cash as of 27 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

As lockdown eased, the trading performance continued to improve and put the Company in a better position to handle the COVID-19 uncertainty. However, the external environment remained challenging. The Company’s billings were down year-on-year in July and August. Further, it operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The Company is going through a transformation phase and investing more towards the quality of service at this crucial time. The stock made a 52-week low and high of GBX 24.00 and GBX 66.46, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Appreciate Group at the closing price of GBX 26.50 (as on 9 October 2020).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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

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