Appreciate Group: Hardman forecasting FY’24 profits nearly double those of FY’20 (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 Digitising Giving: Delivering the future today. What can you tell us about it?

A1: We reviewed Appreciate Group’s business model in our initiation note published on 1 September 2021, and update report following its interim results, published in November last year.

In this note, we focused on a theme running through both those reports – the digitalisation of the business and how the modernisation of every aspect of procedures, cultures, products and management is fundamentally changing the prospects for the group. Digitalisation can mean different things to different people. I’ll be giving you some practical illustrations of what APP has done in this area, carried out under its now completed strategy PACE (Productivity, Appeal, Clarity, Experience) initiative, which has been used to help modernise the business.

We believe execution is critical – so, in this note, we focused on that, and how APP is delivering the future today. We expect further evidence of it in the April trading update.

Q2: So, tell us a bit more about how APP’s digitisation is impacting on process, procedures and staff?

A2: Some of the productivity improvements developed in the digitalisation strategy include migration to the cloud, digital office collaboration, enhanced chat functionality, and human resource management. The fundamental shift in approach has been helped/reinforced by the office relocation and streamlining of operations. In practice, what this means is a more scalable business, generating economies of scale with efficient processing and fewer errors.

Digitalisation gives information to improve the conversion of sales opportunities, once they have been created. APP is now attracting staff from a broader geographical area, if they have the right skills. Over a third of staff now live outside the immediate area, up from a fifth just three years ago. There is a huge impact on management information with additional data helping to enhance the targeting of specific products to the most likely users. New product launches can be massively accelerated and changes in customer behaviour more rapidly identified, and products amended accordingly.

Q3: And the impact on customers?

A3: The impact on customers is broad, affecting how they purchase products, as well as how they spend on the extended range of APP’s partners. Just some the impacts include the obvious rising use of online redemptions – new products are being delivered digitally and instantly through SMS, email, WhatsApp or Facebook Messenger.

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APP has created an end-to-end, fully digital experience for giftcard purchases, delivery and redemption, with contactless capability in a mobile phone wallet. New redemption partners are being added to reflect the digital experience such as Just-Eat, Uber Eats or Xbox Live. The corporate onboarding process has been reduced from an average of 47 days to under four days.

In addition to making APP easier to deal with, the accelerated onboarding times are reducing the risk of customer loss between appointment and contracts being signed.

Q4: And on the products?

A4: Digitalisation has seen the introduction of new products, which will be attractive to a new range of potential customers. These include new e-gift cards and e-codes, the UK’s first fully digital multi-brand gift card that customers could add to a mobile wallet, a corporate contactless-enabled digital gift card, a gift token, which can later be exchanged for a pre-paid MasterCard.

Q5: And what does this mean for Appreciate Group’s investors?

First, higher profits. Costs are down and revenue up. With the interim results, the company announced that it expected administration costs to reduce to ca.£20m for the current financial year (FY’21: £21.1m) and to ca.£19m next year so despite inflation costs are going down. Operational improvements led to a 13% reduction in seasonal temporary staff to handle peak volumes. On revenue, digital marketing contributed to the 32% increased traffic to the HighStreetVouchers website at the interim stage and digital billings more than quadrupled in two years. Those are all hard facts to date.

Looking forward, having a modern, digitalised model is a pre-requisite for APP being able to compete effectively across the whole gifting and experience markets where its total market share is just 5%. It’s a March year-end and we are forecasting FY’24 profits nearly double those of FY’20 (which was effectively pre-pandemic).

The second potential benefit to investors is to the rating given to those profits. In most UK sectors, listed companies with proven digital models are trading at 2.5-4x the multiple of their analogue peers. On our forecasts, APP is trading on a mid-single digit current year P/E, very much an analogue not a digital valuation rating.

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