Moonpig looks far too plump. The online greetings card and gifting retailer’s shares are priced at almost 35 times forward earnings, more highly rated for growth than when they floated during the most recent national lockdown in February — and that’s despite revenue and earnings before tax and other charges slowing after the easing of lockdown restrictions.
The FTSE 250 constituent was firmly in the “Covid winner” stable of stocks, but rising inflation and a slowdown in anticipated revenue growth then caused the shares to stumble. After that, sentiment improved again.
A fallback in revenue and earnings now that shops have reopened is not surprising. Revenue over the six months to the end of October declined by 8.5 per cent on the same time last year, admittedly less of a dip than analysts had expected. Bulls will point to the fact that revenue was still more than double the pre-pandemic level. But the biggest question for investors is how much of the pandemic-era gains it can hold on to in a trading environment completely free of restrictions. That’s far less assured.
Customer retention over the first half of the year improved, representing 89 per cent of revenue, but that’s partly because the rate at which it is gaining new customers has eased to nearer pre-lockdown levels. Over the past eight months the rate of growth in the frequency of customer purchases versus the pre-pandemic level has been steadily declining. Based upon customer data, Moonpig reckons that metric will remain at about 15 per cent higher than the pre-pandemic level over the long term. What makes Nickyl Raithatha, the company’s boss, so confident? “It’s changed because of actions we’ve taken.” Those actions include increasing the amount of customers using the app and setting reminders for upcoming occasions.
Unlike some of the market’s online retailers, Moonpig is profitable. Last year it made a statutory pre-tax profit of £32.9 million, even after float-related costs, and forecasts suggest £38.3 million this year. But on an adjusted basis, pre-tax profits are still expected to be below last year’s level by 2024. The online card retailer is no Ocado or THG, companies that have thrown piles of cash behind their technology and infrastructure platforms without a hope of turning a profit any time soon. It is profitable and benefits from an element of operational gearing. Rather than pumping up the margin, its bosses have chosen to reinvest higher revenue back into the business, aiming to keep the adjusted pre-tax earnings margin at between 24 per cent and 25 per cent, and to invest in gaining more customers through marketing and improving technology.
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Moonpig expects spending on these areas to continue increasing, but the risk for companies priced for high future growth is that they feel compelled to keep ploughing cash into acquiring more customers even when revenue growth falters, which can dent the margin.
There are other threats, too. Exponent, the private equity firm, retains a 16.9 per cent stake, which brings the risk of an overhang to the shares if the former owner sells more of its holding. Then there’s rising inflation, anathema to stocks priced for high growth.
In short, Moonpig looks over-valued, particularly when you consider that it is expected to make a negative return on equity until at least 2024. With efforts focused on growing market share, there is naturally no dividend, nor a prospect of a cash return any time soon.
Advice Avoid
Why Shares look too highly valued given slowing revenue growth and the potential for the market to turn in the face of rising inflation
DWF
Investors could be forgiven for not knowing what to make of DWF, the only legal firm listed on London’s main market. Shares in the group trade at just under 11 times forward earnings, but income-seekers could do well to pay more attention to the group.
The pandemic precipitated a restructure of its operations, with five divisions reorganised into three: core legal advisory; a connected services that provides complementary services such as claims handling and auditing; and Mindcrest, which specialises in services including compliance and legal analytics.
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About 70 per cent of the group’s top 50 clients use services from more than one of its three divisions, but the plan is to increase that much more. The aim is to cross-sell services to multinational clients, which it also hopes to capture by expanding its geographical footprint. That is sometimes done by entering into exclusive associations with legal firms in various jurisdictions. That is not only a more prudent way of gaining more business leads in a new market, but also can lay the groundwork for an eventual takeover of said firm. Cutting headcount and closing underperforming offices last year improved the cost-to-income ratio to 39.1 per cent over the first half of the year, from 40.4 per cent the same time last year. That also helped to boost the gross margin to 51.3 per cent, versus 49.6 per cent the same period last year.
However, in the longer term margin improvement is expected to come from a recovery of the intense investment in the connected services division and shifting more processing and volume work to Mindcrest, which it can carry out at a lower cost than the legal advisory business.
Adjusted pre-tax profits are forecast to reach £38 million this year by Shore Capital, the house broker, which bodes well for the dividend. That payment is based on profitability in any given year, towards a target of 70 per cent of profit after tax. Last year’s payment of 4.5p represented 61 per cent of adjusted after-tax profits and is forecast to rise to 6.6p this year by Shore Capital. At the present share price, that would equate to a potential dividend yield of 6.1 per cent.
Advice Buy
Why Attractive dividend at an undemanding rating
