Card Factory PLC

Card Factory PLC (LON: CARD) is a FTSE All-Share listed specialist retailer of greeting cards and complementary products.

Rationale for Valuation – SELL at GBX 57.70

• Profit Booking: CARD has yielded over 41% return in the past year and therefore, investors can liquidate their position with decent gains as per their risk-return profile.
• Business Uncertainty: Acute inflationary pressure and supply chain concerns can last even further with concerns related to the Omicron variant.
• Technical Indicator: From a technical standpoint, 14-day RSI (~58.57) indicates an overbought scenario, while the stock price has breached the upper Bollinger Band.
• Weak Profitability: In FY21, gross margin, operating margin and net margin remained lower than the industry median of 48.1%, 7.4%, and 3.4%, respectively.

Key Risks

• Weak Retail Sales: British retail sales growth fell sharply in the first half of December 2021 due to the concerns related to the Omicron coronavirus variant.
• UK GDP: The UK economy witnessed a disappointing GDP growth of around 0.1% during October 2021, less than the estimates of 0.4%.

Trading Update (for the quarter to 31 October 2021, as on 8 November 2021)

• Sales Performance: There was a gradual improvement in sales, while the average basket value over the quarter exceeded pre-pandemic levels and offset lower transaction numbers.
• Online Trading: The strong performance of Getting Personal offset the subdued sales from cardfactory.co.uk. Both online brands traded better than the pre-pandemic levels.
• Reduced Net Debt: At on 31 October 2021, CARD reported a net debt of £108.4 million, compared to £142.5 million on 31 October 2020.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

As CARD’s stock price has given a decent rally in the past year and, it is giving an opportunity to book profit with decent gains. Meanwhile, the arrival and sustained impact of the Covid-19 with the Omicron variant can pose various challenges across the globe. Furthermore, there is a softer outlook for consumer spending amid soaring energy prices and moderating outlook for the UK economy, which can dent the overstretched position of the stock. Therefore, it is prudent to liquidate the position at the current level. The stock made a 52-week high and low of GBX 97.83 and GBX 30.50, respectively.

Based on the decent gains, weak profitability, overbought technical stance, uncertain macroeconomic outlook, and unfavourable valuation done using the above method, we have given a “SELL” recommendation on Card Factory PLC at the current market price of GBX 57.70 (as on 22 December 2021, at 9:28 AM GMT).

Gattaca PLC

Gattaca PLC (LON: GATC) is a FTSE AIM All-Share listed specialist Engineering and Technology recruitment solutions business.

Rationale for Valuation – SELL at GBX 149.60

• Profit Booking: GATC has yielded over 99% return in the past year, and therefore, investors can liquidate their position with decent gains as per their risk-return profile.
• Macroeconomic Instabilities: British’s Company insolvencies hit pandemic highs in November 2021. Moreover, the increased costs, supply chain issues and rising COVID cases can exacerbate the situation.
• Technical Indicator: From a technical standpoint, 14-day RSI (~54.78) approaching the overbought zone, while the stock price is hovering close to the upper Bollinger Band.
• Weak Profitability: In FY21, gross margin, operating margin and net margin remained lower than the industry median of 72.2%, 10.9%, and 5.2%, respectively.

Key Risks

• Small Market Capitalization: It is trading as a penny stock with small market capitalization, and it is exposed to market volatilities. Moreover, the Company has a history of operating losses, and thus, it can also face liquidity issues.
• Economic Challenges: Weak industrial date, global shortage of semiconductors, supply constraints, tightening of monetary policy can hamper the business prospects.

Preliminary Results (for the year ended 31 July 2021, as on 4 November 2021)

 (Source: Company Website)

• Profitability: With strong cash management despite the impact of Covid-19 pandemic, GATC reported a profit before tax of £3.2 million (FY20 restated: £4.8 million).
• Robust Balance Sheet: At the end of FY21, the Group reported an adjusted net cash position of £19.9 million, while it repaid the revolving credit facility in full.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

Given the prevailing market scenario, GATC’s clients are confronting difficulties in identifying and securing specialist talent. As GATC stock price has breached our previous target price and has given a decent rally in the past year, it is giving an opportunity to book profit with decent gains. Moreover, the uncertainties regarding the new lockdown restrictions with rising cases of the Omicron variant of the coronavirus, can lead to global equity sell-off and wipe-off the recent gains. The stock made a 52-week High and Low of GBX 288.00 and GBX 68.00, respectively.

Based on the weak financials, decent gains, overbought technical stance, uncertain macroeconomic outlook, and unfavourable valuation done using the above method, we have given a “SELL” recommendation on Gattaca PLC at the current market price of GBX 149.60 (as on 22 December 2021, at 8:55 AM GMT).  

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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