Appreciate Group continued progress in the rollout of the digital model (LON:APP)

Hardman & Co

Appreciate Group plc (LON:APP) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: You called your note “Interim results: solid progress, digital delivering”. What can you tell us about it?

We reviewed Appreciate Group’s business model in our initiation, Solid core + digital disruption = unique model, published on 1 September. On 23 November, the company released its interim results, reporting a modest seasonal loss, in line with the nature of its business.

The key takeaways though were i) continued progress in the rollout of the digital model, including both distribution and efficiency, ii) reversion to more normal customer patterns of redemption and in larger corporate client behaviour, and iii) growth in redemption partners, especially in hospitality, leisure and food. The Xmas Savings business is being reinvigorated. The full-year outlook is in line with expectations.

Q2: So, can you tell us a bit more about their strategic progress?

A2: We cannot understate how important is the digital transformation at the group.  It is fundamentally changing the way the company operates and once the market has confidence in its delivery could see a transformation in the rating too.

With these results digital helped drive i) operational improvements, with reduced use of overtime and seasonal temporary staff during the peak trading period, ii) digital billings, which were up 15.7% to £28.0m (1H21: £24.2m), while paper billings fell from 19.2% to 14.5% within the product mix, and iii) strengthened marketing, with greater use of insight and digital marketing to support further growth in digital products.

The company continued to build awareness through PayPoint’s 28,000 UK retailers and customers in the early stages of this relationship. Implementation of ongoing strategic plans included i) launching the first campaign specifically promoting Love2shop, the brand that underpins all the company’s products, ii) 54 new redemption partners, mainly in hospitality, leisure, and food, iii) reinvigorating the Xmas Savings product with enhanced advertising, marketing and engagement with agents, iv) the Enterprise Resource Planning (ERP) programme implementation phase, planned for January 2022, avoiding any disruption during peak trading, and v) further ESG commitments.

Q3: They walked away from a big contract. What can you tell us about the impact and why did they do that?

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A3: We note the c£3m drop in billings in 1H and more to fall away in 2H because the company has decided not to supply to a low-margin direct competitor. We understand that this was their decision, having tried to adjust the pricing and the counterparty refusing to accept the new terms.

It could be interpreted as reflecting great confidence in the growth of the business – that this contribution to fixed costs can be foregone at this stage. We understand that the review of the whole order book does not show any other significant contracts at risk, because they are on such adverse terms.

Q4: And what about PayPoint?

A4: We had been looking for a detailed update on how the PayPoint distribution partnership was going. It appears to have got off to a slow start since the launch in May, with APP commenting that it had “continued to build awareness through PayPoint’s 28,000 UK retailers and customers and explore opportunities to enhance services offered through its network”.

In the analyst meeting, the company acknowledged that, to date, relatively few franchise partners had become involved, as it struggled to get the attention it had hoped for. It is still early days for the relationship, and we expect the company to test different approaches until it finds success within the 28,000- strong network. In the meantime, the main “cost” has been in management time and resource.

Q5: What is the outlook for Appreciate Group from here?

A5: The company sees the full year in line with expectations. Against our pre-results forecasts, billings are down, due to a slightly slower-than-anticipated start at PayPoint, and the company choosing not to renew a low-margin contract, but that is offset by the lower costs.

With these results, they announced that it expected administration costs to reduce to c.£20m for the current financial year (FY21: £21.1m) and to c.£19m next year driven significantly by the digitisation I mentioned earlier. We expect profits to rise from 1.3m last year to £7m this year and 9.3m next year. And, as I said earlier, the choice to walk away from a low margin contract demonstrates great confidence in long term growth.

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