Card Factory Plc - Online sales exceeding expectations

Card Factory PLC (LON: CARD) is a FTSE All-Share listed retailing Company, which deals in gift dressings, gifts and greeting cards.

On 29 September 2020, the Company will announce the interim results for the six months to 31 July 2020.

Rationale for Valuation – Speculative Buy at GBX 36.40

• As per valuation metrics, Price/Earnings, EV/Sales and EV/EBITDA multiples of the CARD are currently lower as compared to the corresponding multiples of the Speciality Retailers industry. It reflects, shares are undervalued as compared to the industry.
• It has decent fundamental metrics as it has maintained a net margin above 10% for the last four years, which is higher than the industry median.
• CARD witnessed a CAGR growth of ~4.29% in total revenue over the period of FY16 to FY20.
• The return on equity (ROE) stood at 23.5% in FY20, which was higher than the industry median.

Key Risks

• The Company is facing a significant financial impact due to stores closure with coronavirus led restriction.
• Also, the lockdown impacted key seasons such as Father’s Day and Easter, while there has been reduced demand for Thank You Teacher, Wedding and Children’s Party ranges.
• A second wave of the pandemic would result in the shutdown of the stores and might hamper the supply chain of the group.

Trading Update (as on 28 July 2020)

• The sales from the stores have exceeded the initial anticipations.
• Online sales from both gettingpersonal.co.uk and cardfactory.co.uk increased from the previous year's sales, with an increase in like-for-like sales of 68.9% (for the current financial year to 19 July 2020).
• During the period of store closures (from 23 March 2020 to 14 June 2020), the Company had delivered growth of 120.7% in Online like-for-like sales.
• As of 19 July 2020, the net debt stood at £144.2 million, which was below the original forecast.
• CARD also launched a new website, new cardfactory.co.uk, on 2 July 2020.

One Year Share Price Chart

Daily Chart as of 9 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

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

Conclusion

The Board has shown good trading movement since stores have reopened. The aggregate revenue is expected to be around £100 million in H1 FY21, which will be down from the previous year (H1 FY20: £195.6 million). This decrease was driven by a 12-week period of store closures. Over the next five years from FY21 to FY25, the average capex will be approximately £16 million per annum, with capex of £12 million in FY25. Overall, it has taken significant actions to strengthen financial liquidity and remained highly cash generative. Also, the Company has established several retail partnerships within the United Kingdom and Overseas market.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Card Factory at the current market price of GBX 36.40 (as on 9 September 2020, before the market close at 1:50 PM GMT+1), with lower double-digit upside potential based on 1.14x EV/NTM Sales (approx.) on FY21E sales (approx.).

Mind Gym Plc – Strong balance sheet, with solid digital growth

Mind Gym Plc (LON: MIND) is a Support Services Company, providing business improvement and human capital solutions globally.

Rationale for Valuation – Speculative Buy at GBX 102.50

• The Company has a strong market presence with clients, which include FTSE 100 and S&P 100 as well as governments, private companies, and not-for-profit organisations.
• Mind Gym Plc witnessed a CAGR growth of 17.83% in revenue over the period FY16 to FY20, while net profit (from continued & discontinued operations) recorded a CAGR growth of ~39.51% during the same period.
• The return on equity (ROE) stood at 37.9% in FY20, which was higher than the industry median.
• In the last one month, the Company delivered a decent return of 13.89%, significantly higher returns compared to the FTSE AIM All-Share Index.
• In the past three years, the Company recorded a lower debt-equity ratio of 0.25 (FY20) against the industry median, which reflects that MIND is less leveraged as compared to the industry.
• From the technical standpoint, shares were trading above the short-term support level of 50-day simple moving average price (GBX 95.75), which reflects an uptrend in the stock and carrying the potential to move up further.

Key Risks

• The economic downturn in the corporate learning and development market could affect the Company’s future revenue and may cause clients to cancel, reduce, or postpone existing bookings.
• The employment services providers are closely synched to the level of employment and job openings within the geographies they operate; hence, any such scenario would impact them adversely.

Recent News

On 2 September 2020, the Company announced that it had launched the second year of a SAYE (Save As You Earn) Scheme for all eligible employees in Singapore, Canada, and the UK.

Financial Highlights (for the year ended 31 March 2020, as on 11 June 2020)

(Source: Company Website)

• Mind Gym delivered a positive performance in FY20.
• The Group has doubled the cash balance in FY20, while continuing to invest in future growth including senior hires and digital.
• During the year, the average number of staff increased by 19% year-on-year to 247 (FY19: 208).
• The continued strong cash generation during FY20 resulted in year-end cash of £16.0 million (FY19: £8.3 million) and no bank borrowings.

One Year Share Price Chart

Daily Chart as of 9 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

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

Conclusion

In FY20, the Company achieved double-digit top-line growth and doubled the cash balance. The strong balance sheet provides resilience during the continued COVID-19 uncertainty and an opportunity to accelerate digital investments. The Company expects that COVID-19 creates a strong opportunity to accelerate the existing digital offering and grow market share in the medium term. It is planning to recruit and develop 40 strong digital teams based in the UK in 2020. Given the strong cash conversion ratio of 136%, the Company seems to be well-positioned to deliver a return to growth once the worst effects of COVID pass.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Mind Gym at the current market price of GBX 102.50 (as on 9 September 2020, before the market close at 9:30 AM GMT+1), with lower double-digit upside potential based on 2.20x EV/NTM Sales (approx.) on FY21E sales (approx.).

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

*Dividend Yield may vary as per the stock price movement

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