FDL.LON - Findel

[60North Investments]

A hat tip to red corner for bringing this company to my attention. It is a retail (Express Gifts & Kitbag) and educational supplies (Findel Education) company from the U.K. Most of the info below is from Edison's analyst reports and red. I can highly recommend taking a look at especially the reports as they provide nice color.

 

Express Gifts: home shopping (good value products, personalization, flexible credit), incorporates consumer credit offer, grown steadily since new management late 2010. Need to apply to FCA for full consumer credit permissions. Also upgrading consumer credit system, +50% of sales are with credit. 1.4m active customers, 89% female. 64% live in family household, 37% have children. 54% from households with income below £30k. 54% take credit, on average £240, pay off in 9 months (bad debt just moved below 10% of sales, been trending downwards). Written & phone orders 48%, rest online. Average online order £52, offline £45. 42% buy personalized products. Accrington distribution facility's capacity 300k items per day (now doing roughly 200k IIRC). Competitor N Brown, very similar EBIT%, more clothing-focused I think. EG's 2015 GM 51.6%, EBIT 11.1%, 2014 52.6% & 10.6%.

 

Kitbag: sells club-branded replica kits (deals with the major clubs in different sports), officially licensed outlets etc, bad contracts by previous management undermined profitability for past 3 years. 2014 Oct "full strategic review", several expressions of interest. 29 May 2015, management decided that it's best that Kitbag will continue under Findel. They see continuing improvements. Kitbag's 2015 GM 44.3%, EBIT -1.6%, 2014 42% & -6.2%.

 

Findel Education: supplies schools with stationary etc. Estimated market share 7-8%, market leader. Room for consolidation? Education's 2015 GM 34.9%, EBIT 4.1%, 2014 34.8% % 3.7%.

 

Balance sheet: as the company offers financing for customers (Express Gifts), they have a credit book in their balance sheet. It is located in trade receivables & long-term borrowings, and is about £120m.

 

Convertibles: there's 8.34m convertible shares which will be converted if the share price is above 479.4p for one month before March 2021. There's also currently 5.4m outstanding options.

 

Risks: some of the risks are i) consumer spending (they target lower income people, so government policies that make them worse off, rising interest rates, oil/gas prices etc. things that reduce the money these people have available for spending), ii) issues with Kitbag and Education (education especially affected by government spending on schools), iii) the fact that Express Gifts makes almost all of the profits (Amazon? Something else disrupting it?) and iv) FCA approval (probably quite likely to get it in early 2016, but still a risk).

 

Valuation: summarized, in a base case they get to £40m EBIT in FY16, coming from £35m EG + £5m Education + £0m Kitbag. Give a multiple on that, for example 10 (N Brown for example trades at EV/EBIT 12) which I think is at least neutral given that EG looks like a decent (good ROICs when you back out the credit book), growing business (unless something happens that disrupts it, that's the bear case). Assuming core net debt (credit book excluded) of £70m (reducing by about £10m/year, should be reasonable) you get £330m for the market cap. Divide with 90m shares (assumes almost all of the 5.4m options get exercised) to get 366p/share, compared to 203p (26th June).

 

Have others on the board looked at Findel? What is preventing me from taking a position currently is that I haven't yet understood really how Express Gifts won't be taken down by someone like Amazon (plus the unknown unknowns that I haven't thought of). Are personalization of items and offering credit enough to keep the business going? Amazon has been in the U.K. I believe for years already so it seems like it won't take away EGs business (as it keeps on growing at a nice pace still). I'd appreciate all the thoughts!