Retail and consumers

Investors’ Chronicle: YouGov, Kingfisher, Trustpilot

BUY: YouGov (YOU)

Demand for customised data is driving growth at the survey specialist, writes Jemma Slingo.

Concerns about demand are weighing on YouGov’s share price, which has fallen by a fifth since March last year. Will companies still pay for survey results and market data as economies slow down? Or will they cut costs anywhere they can?

YouGov’s interim results suggest its products are more valuable to clients than many investors feared. Revenue increased by 30 per cent year on year to £131mn, while adjusted operating profit jumped by 58 per cent to £22.1mn. Of this rise, 32 per cent was achieved without any help from acquisitions or currency movements.

Performance wasn’t consistent across the board. The custom research division increased revenue by 28 per cent on an underlying basis, and its adjusted operating profit shot up by 78 per cent to 14.2mn. By contrast, demand for data services — which refers to quicker, survey work — fell, and profits tumbled by a quarter to £3.2mn. 

This is not necessarily a big problem. It does, in part, reflect lower demand: outgoing chief executive Stephan Shakespeare flagged that PR firms were requesting fewer quick-fire polls. However, he added that many clients were also trading up from data services to higher-margin, customised products. This is reflected in the group’s overall operating margin, which rose by 3 percentage points to 17 per cent.

Other factors are bolstering YouGov’s margins as well. The group has been investing heavily in technology, people and panellists, and this is starting to pay off in the form of operational gearing. Shakespeare added that even customised work is becoming “very repeatable” with more clients opting for templated solutions.

Whether margins can keep getting wider depends, of course, on future demand, but the group’s near-term prospects look good. YouGov said it is confident of hitting full-year revenue forecasts of £265mn, which implies annual sales growth of 20 per cent. Helpfully, a third of YouGov’s revenues come from subscriptions, while half of sales tend to recur, so there shouldn’t be too much guesswork involved. Indeed, Shakespeare said the group had “never had a point where so much of the rest of the year is budgeted”. 

YouGov shares don’t come cheap. However, the group is considerably less expensive than it has been in the past, trading on a forward price/earnings ratio of 23, compared with a five-year average of 37.2. While the backdrop remains uncertain, therefore, and a new chief executive has still to be announced, now looks like a decent time to buy in.

SELL: Kingfisher (KGF)

The DIY retail group adjusts to life after the pandemic with some bad news for investors, writes Mitchell Labiak.

The Covid home improvement boom is over. Or at least it is for DIY retail group Kingfisher, owner of brands including B&Q, Screwfix and Tradepoint. Its revenue dipped and pre-tax profit slumped in its results for the 12 months to January 31 due to a combination of tougher trading conditions and higher business costs. The downbeat results were in line with analysts’ expectations, and the company said that it is “comfortable with current consensus of sellside analyst estimates” for next year’s adjusted pre-tax profit to fall a further 16.5 per cent.

Investors might not be quite as comfortable with such a bearish prediction. Neither will they be overly pleased with the fact that dividend payments have stopped increasing and that the company expects to pay out dividends in line with the same coverage window next year — 2.25 to 2.75 times adjusted earnings per share — while also accepting a fall in those earnings. There is scope, in other words, for dividend payments to fall.

To Kingfisher’s credit, such a move might be wise considering the increase in net debt and large drop in cash and cash equivalents. The company spent £500mn paying out dividends over the previous two accounting years. Then again, any drop in dividend payments would make competitor Wickes even more generous by comparison. As of its last set of results, Wickes had a dividend yield of 10.1 per cent and was priced at six times earnings per share (EPS), compared with a yield of 4.5 per cent and a price of 11 times EPS for Kingfisher. Neither rating stands as a vote of approval.

Kingfisher’s like-for-like sales are still 15.6 per cent higher than pre-pandemic levels, and the company says it has managed inflation through the use of in-house brands. Those in-house brands didn’t leave it completely unscathed by cost inflation last year, but the fact that inflation looks likely to have peaked is a good sign for the business. So, too, is the fact that sales are up 1.9 per cent on last February. Meanwhile, the continued rapid growth of its online sales and its ambitions to open up physical outlets in Poland and France give it more directions for future growth.

Even with these tailwinds, we downgrade our rating because we do not believe Kingfisher currently represents as good an investment as its cheaper and more generous rival Wickes. Analyst IG Group says “perhaps a little bit more downside is due in the short term to bring it back to more attractive valuation levels” and we agree, considering its price relative to Wickes. There are bull points for Kingfisher in the long run, but for now our view is bearish.

HOLD: Trustpilot (TRST)

The association with failed Silicon Valley Bank is hardly good PR, writes Mark Robinson.

Recent events suggest that the financing window for tech companies could conceivably narrow as we move forward. Trustpilot, an online review platform founded in 2007, burnt through roughly $12mn (£10mn) in 2022, but potential investors would have been more interested to learn that it had $36mn tied up with Silicon Valley Bank’s UK entity, of which two-thirds was “immediately accessible”.

The fact that HSBC has stepped in to support SVB’s UK subsidiary provides a degree of reassurance, but whether it remains Trustpilot’s “principal banking partner” is open to question. Presumably, HSBC will conduct a risk assessment of the businesses it has indirectly taken under its wing, so any investment decision needs to be taken in that context.

We originally reviewed the activities of Trustpilot a year ago, when it was struggling with “spiralling costs from wage inflation and one-off listing expenses”, along with issues linked to fake reviews on its site — a much wider problem, to be fair. A year on, and the platform’s total cumulative reviews have increased by 27 per cent to 213mn, while the number of active domains eclipsed 100,000 for the first time. More importantly, the company expects adjusted Ebitda profitability and positive adjusted free cash flow this year.

Separately, Peter Holten Mühlmann, the company’s founder and chief executive, has indicated that he wishes to transition into the role of founder and non-executive director, where he will be an “evangelist and brand ambassador”. 

Leaving aside any banking uncertainties, the online platforms that have proved profitable are those with a truly differentiated offering and Trustpilot operates in a somewhat crowded space. HSBC may well be swayed by the company’s immediate financial prospects, but given uncertainties we do not share the outgoing chief executive’s apparent religious zeal.


Business Asia
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