Appreciate Group FY’22 results beat market expectations (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 on Appreciate Group FY’22 results: going for growth. What can you tell us about it?

A1: The FY’22 results beat market expectations and saw strong digital growth, as well as a return to more normal redemption patterns. Unsurprisingly, the shares have reacted since.

We reviewed APP’s business model in our initiation, Solid core + digital disruption = unique model, which was published on 1 September 2021, and where we emphasised the importance of transforming the group into a growth, digital model.

For us, the key to these results was not the short-term numbers, but rather the strategic growth. In addition to 20% digital billings growth, and further efficiency gains, APP announced an acquisition, which is expected to accelerate the company’s plans by 18 months.

Q2: So, you say the strategic growth is the important thing. What can you tell us about that?

A2: Digital billings increased by 20.5% to £55m (excluding the free school meals deal). This was achieved despite the prior year being a period when physical products could not be dispatched, leaving largely digital-only options available to customers. Looking forward, we expect that, within two years, digital billings will be the joint-biggest channel, and the largest channel within three years.

However, APP’s digital story is about much more than just revenue.  It is about transforming the whole business model, and I will give two examples here: i) importantly, it confirmed its expectations that operating costs are expected to be ca.£19m next year, down from £21m this year; and  ii) digitalisation allows for rapid action to be taken. At the half year, we highlighted that the overall visits to Highstreetvouchers.com (HSV) were up 31.8%, from 1.95m to 2.57m, with conversion rates stable at 4.4%. With the rapid data that digital information provides, we understand management could quickly assess that the return on investment was not as expected – so marketing was quickly scaled back for HSV, and visits were actually down 6% at the year-end.

Q3: And you mentioned an acquisition, what can you tell us about that?

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A3: Basically, APP is pending £1.65m on an initial consideration and up to £1.8m of a deferred consideration for a Northeast-based gift card technology provider to UK businesses and consumers. The business provides an end-to-end gift card processing and management service for retailers, and a digital gift card mall enabling B2C and B2B customers to purchase gift cards directly from a catalogue of over 160 high-street retailers, in addition to a fully white-labelled eCommerce platform – enabling businesses to launch their own fully functional gift card websites. It will basically accelerate APP’s plans by 18 months, offer enhanced products and skills, and bring opportunities to cross-sell and reduce the reliance on external parties – and all for a lower cost and risk than was envisaged in previous plans.

Q4: And the core Christmas savings products?

A4: The rate of decline in the core Christmas savings products has slowed down dramatically – from 15% last year to just 3% this year – and management is now talking much more confidently about returning the business to growth. This has been achieved by fundamentally overhauling all aspects of the business,  with an enhanced offering to agents, and a broader customer proposition, product range, distribution and service offering.

Q5: There has been some news flow since the results. What do you make of that?

A5: Since the results, the CEO has announced his departure, with the chair taking on temporary executive responsibilities, and the appointment of an interim internal CFO. While the market can get nervous about changes in managements, it should also be noted that there has recently been share-buying in the market for cash by both the chair and an NED, which is, presumably, indicative of their confidence in Appreciate Group.

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