Card Factory Plc - New strategy will deliver sustainable growth and shareholder value.

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

On 19 November 2020, the Company will announce the Q3 Trading Update.

Rationale for Valuation – Speculative Buy at GBX 35.10

• On the liquidity front, the current ratio was 0.97x in H1 FY21, which is slightly higher than the industry median.
• 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.
• From the technical standpoint, 90-day RSI stood at 44.44, which is supporting the upside movement.

Key Risks

• A second wave of the pandemic would result in the shutdown of the stores and might hamper the supply chain of the group.
• 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.

Financial Highlights (for the six months ended 31 July 2020, as on 29 September 2020)

(Source: Company Website)

• The first-half results were in line with previous anticipations, reflecting an increase in the online business of 64.4% (like-for-like revenue). The growth was driven by the positive response from the website relaunch on 2 July 2020 and the increased demand during the period of store closures.
• The Company witnessed a better partnership sales performance than expected, with a sale of £1.9 million.
• CARD reported an operating cash flow of £25.2 million in H1 FY21, £8.9 million lower than the corresponding period of the last year (H1 FY20: £34.1 million).
• All major spring seasons were adversely affected by COVID-19.
• In H1 FY20, the net debt was down, due to cash conservation measures.
• The Company’s store network reduced by seven stores.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is well prepared for Christmas 2020 season, with complementary product availability, Christmas cards to stores and multi-channel fulfilment capacity (which maximise in store and online sales). The Board has shown good trading movement since stores have reopened and witnessed encouraging start to the second half of the year. Overall, it has taken significant actions to strengthen financial liquidity and remained highly cash generative. The stock made a 52-week low and high of GBX 22.00 and GBX 174.73, respectively.

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 35.10 (as on 8 October 2020, before the market close at 8:33 AM GMT+1), with lower double-digit upside potential based on 1.04x EV/NTM Sales (approx.) on FY21E sales (approx.).

Topps Tiles Plc – Shown strong finish to the year and generate a modest level of adjusted PBT in FY20

Topps Tiles PLC (LON: TPT) is FTSE All-Share listed retailer of tiles, which supplies tiles and associated accessories to both trade and retail customer base for the refurbishment of domestic housing.

Rationale for Valuation – Speculative Buy at GBX 46.60

• The Company has decent fundamental metrics as it has maintained a gross margin above the industry median in the past three years. In H1 FY20, the gross margin was 59.2%.
• In the last six months, the Company has delivered a sparkling return of ~41.14%, which is higher as compared to the FTSE All-Share Index.
• From the technical standpoint, 14-day RSI stood at 44.54, which is supporting the upside movement.

Key Risks

• The rising COVID-19 cases and U.S.-China tensions dented sentiment may also impact the business growth trajectory in the near term.
• The UK economy and the business may be adversely affected by regional tensions and instability.
• The Group is exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change.

Trading Update (for the 52-week period ended 26 September 2020, as on 30 September 2020)

(Source: Company Website)

• In the fourth quarter of 2020, the Company’s retail trading remained strongly positive, with a robust home improvement market and an increase in retail sales of 16.5% (on a like-for-like basis) in the 13 weeks to 26 September 2020.
• For the 52-week period, the revenues are expected to be approximately £192 million, with a decrease of 12.5% year-on-year (on a like-for-like basis) in retail
• At period end, the order bay was significantly ahead of the previous year level and provided a positive outlook for FY21.
• In the Commercial sector, the activity has been rebuilding slowly, due to Covid-19 related disruption. However, the Company has seen improvement through re-commencing activity and new specification projects. The Company expects a commercial revenue to be around £7.5 million in FY20.
• The Company witnessed a strong liquidity position, with net cash of around £25 million and available cash headroom of approximately £74 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Retail business has performed strongly in Q4 FY20, and the order bay provided a positive outlook for FY21. While the commercial business is rebuilding more slowly, but it remains a key part of the longer-term growth strategy. The Company has shown a strong balance sheet and seems to be well-positioned to meet future challenges. On 4 September 2020, the Company stated that Stephen Hopson would join the Board as Chief Financial Officer (CFO) on 2 November 2020. Stephen has a strong track record across both consumer and trade facing markets. Overall, TPT remained positive about the longer-term outlook and is on-track as the economy begins to recover. The stock made a 52-week low and high of GBX 25.00 and GBX 81.80, respectively.

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 Topps Tiles at the current market price of GBX 46.60 (as on 8 October 2020, before the market close at 8:40 AM GMT+1), with lower double-digit upside potential based on 0.69x EV/NTM Sales (approx.) on FY20E sales (approx.).

*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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