Investor column: Moonpig, Wise, Mulberry

BUY: Moonpig (MOON)

Trade stabilized after a pandemic boom, but growth remained solid compared to pre-Covid displays, writes Christopher Akers.

Moonpig shares are down about a third since last year’s IPO as investors spooked by the drop after Covid-19 turbocharged the front row. Revenue at the online greeting card and gift retailer fell by a fifth in these results from lockdown-aided comparatives as trading normalized.

It would be easy to get caught up in a post-pandemic narrative of doom and gloom. But the other side of the equation looks pretty good. Moonpig exceeded IPO targets, aims for mid-to-mid-term year-over-year revenue growth, while accepting new customers at a faster rate than before the pandemic, and grew margin forecasts. And looking ahead, the £124m acquisition of gift experience platform Buyagift (expected to be completed in July) is expected to help boost FY2023 revenue to around £350m.

Gross margin fell 120 basis points to 49.3% on the year, due to “the category mix impact of higher gift sales” rather than inflation pressures from costs. Higher shipping costs are mitigated by passing on higher stamp prices. This is encouraging given the broader cost environment.

Julie Palmer, partner of Begbies Traynor, said “Moonpig has the attributes to succeed in a market where we are willing to go online to reduce the effort of giving gifts” but “perhaps the real test will be the pressure on household finances”. The shares are trading at 18 times consensus earnings forward, and an underlying free cash flow yield of 6% offers “good value”, according to analysts at Numis. We maintain our recommendation for now, with a lower share price providing an attractive entry point for investors.

BUY: Sage (SAGE)

Rising administrative expenses are eating away at profit margins, but free cash flow has still increased by 9%, writes Arthur Sants.

When Wise was founded in 2011, its goal was to make international money transfers as cheap as possible. Traditional banks charged fees of up to 3% to transfer money across borders. The level of the charges was regularly decried and Wise knew that it could be done much cheaper. It was an admirable mission and it brought rapid customer growth to the payment business.

In the year to March 31, Wise’s take rate on trades was 0.63%, down seven basis points from a year earlier. This low rate attracts customers. In the last quarter of 2022, it had 4.6 million customers, 31% more than a year earlier. And customers were transferring £4,700 on average, up 7% year-on-year.

More customers and more transactions pushed total revenue up 33% to £560m. Gross profit also increased by 43%. These numbers are impressive. However, to achieve this growth, Wise spent significantly more on administrative and marketing expenses.

In total, administrative expenses increased by 48% to £321 million. Employee spending was the main driver – wage inflation is a problem for many tech companies – rising 31% to £184.8million. Meanwhile, marketing spend increased 30% and outsourced costs increased 55%. This meant the adjusted cash profit margin was 21.7%, down from 26% last year and below the consensus expectation of 23%.

Wise currently holds 3.5% of the cross-border market and wants to capture as many remaining opportunities before other competitors join the low-cost game.

Wise is aiming for annual revenue growth above 20% in the medium term and broker Numis believes this is possible. Inflation should help him achieve these goals, as Wise takes a percentage on transfers. The FactSet consensus expects earnings per share to more than triple to 10 pence in 2024, giving a price to earnings ratio of 33 for 2024. The multiple has contracted significantly since the start of this year (like tech stocks in general) and despite rising operating costs, this seems like a reasonable entry point. Growth comes at a cost and given £113m of cash flow, investors shouldn’t complain too much.

HOLD: Mulberry (MUL)

Rising margins on luxury handbags boosted profits at luxury leather goods maker Mulberry, writes Madeleine Taylor.

Mulberry is benefiting from higher full-price sales and a gain on the disposal of the lease of its Paris store, which has quadrupled profits to £21.3million over the past year. Gross margins also jumped to 71.7% in the year to April 2, from 63.6% the previous year, continuing the British brand’s progression from loss to profitability over the past five years. .

However, chief executive Thierry Andretta tempered the outlook cautiously, saying he expected the business to grow “at a slower pace” from now on due to “serious disruption” caused by the situation. geopolitics, inflationary pressures and Brexit challenges.

One of the factors behind this is its expansion into key Asia-Pacific luxury fashion markets, a mainstay of Mulberry’s recovery strategy since suffering a loss. £5m in 2019. While four-fifths of sales are still in the UK, Asia-Pacific revenues have grown rapidly, with retail sales in China up 59% over the last year. single year passed.

Since the start of the new fiscal year, Covid-related shutdowns have forced the closure of the majority of its stores in China and the Shanghai distribution center. As a result, retail and digital sales fell 1% in the three months to June, although strength in wholesale led to overall revenue growth of 5%.

The shares are currently trading around 50% off their peers, Shore Capital said, adding that this does not reflect Mulberry’s direct-to-consumer strategy or focus on sustainability, which “could result in higher rating”. More than half of Mulberry’s manufacturing is done in the UK, giving it an edge over industry counterparts facing supply chain issues. However, the stock is rather illiquid, with the vast majority of shares held by Singapore’s Ong family and Frasers Group, which could complicate revaluation progress.

Hermione Taylor: double inflation problem

CPI inflation in the UK reached 9.1%. This is the highest level since 1982, exceeding the Bank of England’s inflation target of 2% by more than 7%. And that means trouble for Governor Andrew Bailey. If the Bank misses its target by more than one percentage point one way or the other, he should write a letter to the Chancellor explaining both the reasons for the divergence and the Bank’s strategy to bring inflation back. to the goal. In terms of British monetary policy, inflation of 3% is not desirable. But how much worse is 3% than 2%? And how much worse is 9% than 3%?

Doubling times can provide an intuitive interpretation. At a stable inflation rate of 2%, general prices double every 35 years. The picture is clouded by the fact that inflation is calculated using a basket of goods, which means that the price of some items would increase by more than 2% per year over the period, and others less. But as a general rule, it takes a generation for a basket of goods to double in price when inflation hits 2%.

At 3% inflation, this doubling takes about 23.5 years: a significant acceleration, but still a reassuring period. At 5% inflation, the doubling time is reduced to 14 years. And at a steady rate of 9%, prices are doubling in just eight years.

This acceleration is quite uncomfortable. But the problem is compounded by fears that 9% inflation is unlikely to hold. At high rates of inflation, workers attempt to maintain their standard of living by demanding anti-inflationary wage increases. Wage increases increase business costs, which are then passed on to consumers in the form of higher prices. Wage demands then rise again as households try to keep pace with inflation, and the economy enters a dreadful wage-price spiral.

In extreme cases, this can even tip over into hyperinflation, where increases in the general price level occur at breakneck speed. Steve H Hanke of Johns Hopkins University identified 57 historical cases of hyperinflation, defined as inflation rates above 50% per month for more than 30 days. Belarus, for example, experienced a “mild” case of hyperinflation in 1994, with monthly inflation reaching 53.4%. Prices doubled in just 49.3 days. In Zimbabwe in 2007, monthly inflation reached 4.19 × 1016% – a staggering figure made easier to understand in the context of prices doubling every 15 hours.

That’s not to say the UK economy risks anything near these levels: in fact, inflation looks more likely to fall over the next 12 months than rise. Paul Dales, chief UK economist at Capital Economics, argues that although inflation has yet to peak, this month’s release showed no clear signs of lingering inflationary pressures. According to the CBI’s Monthly Industrial Trends Survey, business expectations for higher prices have declined this month, with signs that weaker activity is starting to slow the pace of price increases. The Bank of England, for its part, expects the inflation rate to slow next year and return to close to 2% in about two years.

Doubling times can also provide a useful rule of thumb for investing. First, they point out the importance of keeping an eye on management fees. Take an investment yielding a good 6 percent. With an annual cost of 0.5%, its nominal value will double in 13 years. With costs of 2.5%, the doubling time spans over two decades. Doubling times also illustrate the importance of keeping pace with inflation – currently easier said than done. Taking into account an optimistic inflation rate of 2%, this last investment would take nearly 47 years to double in real terms: a troubling doubling time indeed.

Hermione Taylor is economics editor for Investors’ Chronicle

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