Appreciate Group “gives investors potentially explosive growth” says Hardman & Co (LON:APP)

Hardman & Co

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

Q1: You called your note Solid core + digital disruption = unique model. What can you tell us about it?

A1: Appreciate Group gives investors potentially explosive growth through new digital offerings in the gifting/engagement markets, where its share is just 3%. This is uniquely combined with a dominant 71% market share in the consumer pre-paid Xmas savings market, which brings decades of key partnership management experience.

FY’21-22 has been a challenging period for Xmas savings but Appreciate Group is generating the profits to fund the digital growth. Digitalisation not only opens new markets (a European comparator quadrupled sales in two years), but also improves efficiency and customer service, and typically sees share ratings double those of non-digital models.

Q2: What can you tell us about the business itself?

A2: The company meets consumer and corporate demand for pre-payment, gifting, and customer/staff engagement through a range of vouchers, cards, and e-codes. The products are managed through four brands, each with their own website – Love2shop, highstreetvouchers.com (HSV), Park Christmas Savings and Appreciate Business Services. It is committed to innovative new products and the distribution of emerging technologies. The historical core of the business was Xmas savings, although this now accounts for less than half of total billings. This product helped cash-strapped, lower-income groups save a little on a regular basis throughout the year, and so spread the cost of Xmas.

The company faced a challenging FY’21/22, when COVID-19 factors limited both sales and redemption of the products. Billings are broadly evenly split between consumer and corporate customers, with more growth from corporate over the medium term. Cards are now the biggest product, measured by billings, overtaking paper vouchers in FY’20, and digital products are growing strongly. Multi-retailer products dominate single-store products and for as long as shopping is seen as a pleasure experience, the ability to redeem in-store is an important advantage over pure online-redemptions vouchers.

Q3: Digitalisation is clearly an important trend. What is going on there?

A3: Following the appointment of Ian O’Doherty as CEO (1 February 2018) and Tim Clancy as CFO (28 August 2018), the company laid out its strategic plan in December 2018.

The objective was to move from a model based off paper vouchers, and a physical presence with a dated infrastructure, to an increasingly digitalised and online approach, using state-of-the-art technology. In this context, digitalisation is about the way products are redeemed, and processes and procedures.

Execution of this plan was focused into four pillars, called PACE – productivity, appeal (to customer to drive growth), clarity and experience. We note that, pre-COVID-19, Appreciate indicated that it was looking for its digital model to add £2m-£5m p.a. to pre-tax profits over three to five years (implying an initial growth rate of 20%-50%). This target appears very credible in terms of what has been delivered by comparable models, although its delivery has been delayed by COVID-19. Digital models typically trade at twice the ratings of non-digital ones.

Q4: And there was an exciting new deal with PayPoint. What is that about?

A4: We believe the 27 May 2021 announcement of the partnership with PayPoint is a major step forward in distribution. Consumers are now able to purchase Love2shop e-gift cards via PayPoint’s network of 28,000 retailer stores across the UK. PayPoint is the largest provider of electronic point-of-sale technology to the SME and convenience retailer market across sectors, including food services, garages, convenience stores and hospitality. 99.5% of the urban population lives within one mile of a PayPoint retailer partner, and 98.3% of the rural population lives within five miles.

Capitalising on this opportunity requires work and especially a prioritisation by the convenience store operators to sell Appreciate products. Just £714 of vouchers sold per store per year adds £20m (5%) to the company’s billing.

Q5: And what did we learn from Appreciate Group’s recent results?

The shares fell on the announcement day, with current trading behind plan, as customers take time to revert to normal behaviour; Xmas billings forecast to fall 14% in FY’22 (against the 11% reduction expected in April), and vi) an FCA e-money safeguarding audit identified some issues, which we expect to be the market-wide result – for APP, there has been no loss of funds, but the changed procedures are likely to see incremental costs going forward.

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