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Investors’ Chronicle: Trainline, Boohoo, Card Factory

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HOLD: Trainline (TRN)

The ticketing platform expects revenue to exceed pre-Covid levels by 2023, writes Jemma Slingo.

After two years of lockdowns, commission rows and rail reform, Trainline is almost back on track. The travel platform has seen ticketing sales rebound over the past 12 months, and UK consumer sales have now reached 89 per cent of pre-pandemic levels.

As a result, Trainline has narrowed its operating loss to £10mn, down from £100mn last year. It has also generated enough cash to pay off a chunk of its net debt, which stands at £90mn, compared with £241mn in February 2021.

Management is confident of future growth, both in the UK and internationally. Online bookings in the UK represent more than half of total rail sales, up from 39 per cent pre-Covid. Trainline says there is still “significant headroom” for e-tickets, and there is no doubt that the group’s app is slick and user-friendly. Concerns about how much commission Trainline will be allowed to charge have also been allayed, after it struck a deal with the Rail Delivery Group. 

In Europe, Trainline says domestic competition between rail carriers is picking up, which should enhance its role as a third-party aggregator. It is also hiring around 150 tech engineers and data scientists to help drive sales. 

There are still concerns, however. Before the pandemic hit, Trainline Partner Solutions — which mainly provides rail technology for travel management companies — was an important source of ticket sales, generating about a quarter of UK revenue. Demand for these services remains very weak. 

The government’s “Great British Railways” project is still casting a shadow as well. While details are scarce, the Department for Transport intends to create a new central ticket retailer, which would pose a direct threat to Trainline’s business model.

Government projects are not known for their speed, however, and Trainline has plenty of scope to grow in the meantime.

HOLD: Boohoo (BOO)

Profits have plunged at the fast-fashion brand as a result of inflation, writes Jemma Slingo.

After an excellent lockdown, Boohoo has fallen back to earth with a bump. The fast-fashion retailer has reported a 28 per cent fall in adjusted cash profit, and a 94 per cent drop in pre-tax profits.

Boohoo has been buffeted by headwinds over the past year. Freight and logistics price rises reduced its Ebitda by about £60mn, while its marketing costs rose by £22mn, driven by weaker demand and the need to get new brands off the ground.

As such, Boohoo’s adjusted Ebitda margin has shrunk from 10 per cent to just 6.3 per cent.

Despite its woes, Boohoo remains popular with its young audience. Active customer numbers across the group have risen by 43 per cent over the past two years to 20mn, and people are ordering more frequently from the website. The average order value is up by 8 per cent year-on-year at £48.16.

This is not the full story, however: customer returns are also rising steeply. In the UK — which accounts for 61 per cent of revenue — a third of purchases are now being sent back, compared with less than a quarter in 2021. Meanwhile, in the US, lengthy delivery times have subdued demand for the group’s established brands.

Analysts at Jefferies reduced their Ebitda forecast for 2023 by 18 per cent in wake of Boohoo’s results. However, they argue that the retailer has built a “more developed” business through the pandemic, with more brands, more customers, more market share and more infrastructure. Whether sales growth will translate into profit growth is now the question.

HOLD: Card Factory (CARD)

Revenue rose as lockdown restrictions were removed, but there is maybe too much of a reliance on the high street, writes Christopher Akers.

Card Factory depends on its stores for the vast majority of its revenue, meaning that the end of lockdown restrictions was a moment of great relief for the business in a financial year when stores were closed for 10 weeks (which was still much better than the five months of closures in 2021). The purveyor of greetings cards, gifts, wrap and bags returned to profit in these results as customers hit the high street again and, with a refinancing completed after the year-end, the business is making steady progress on its long road to recovery.

Investors will be buoyed to see the rebounding of store sales, up by a third to £336mn. Online sales fell by 2 per cent to £10.9mn, but are importantly up by almost a quarter on pre-pandemic levels. Darcy Willson-Rymer, chief executive, said that management is focused on turning the business into a “omnichannel retailer” but whether Card Factory’s online offering can take a bigger slice of the relative revenue take in the future remains to be seen — this is surely needed if management’s target of £600mn in sales in financial year 2026 is to be achieved. 

The refinancing took place in April, and steadies the ship. Revised terms mean that the company is no longer obliged to raise new equity to pre-pay debt facilities, and is left with £150mn of facilities. Encouragingly, leverage was down to 2.3 times at the year-end which is consistent with pre-pandemic levels.

Consensus forecasts have the shares trading on seven times forward earnings. This looks cheap against the five-year average of 10 times. But there is still much work to be done to hit management’s revenue targets, with analysts expecting £445mn of sales in 2024.

Chris Dillow: Defying high valuations

Despite their recent sell-off, US equities are still close to their most over-valued levels ever — but recent history suggests this might not matter much.

In recent years, however, US equities have ceased to behave as they should. For much of this century, an apparently expensive market has simply got even more expensive. The dividend yield and cyclically-adjusted price/earnings ratio predicted medium-term returns for much of the 20th century, but have not done so since. Five years ago, for example, the cyclically-adjusted price/earnings ratio, at 28.9, was 72 per cent above its long-term average — but the S&P 500 has since risen by over 60 per cent after inflation.

Whatever valuation measure you use, the fact is the same: equities used to mean-revert with expensive markets falling and cheap ones rising, but this has ceased to be the case. In fact, the S&P 500’s real-terms price gains in the past 30 years have been close to the best ever — although, due to low dividends, total returns have been less spectacular.

This poses the question: why have expensive markets simply become even more expensive?

It’s certainly not because the economy has done unusually well. Quite the opposite. In the past 30 years real GDP has grown by only 2.5 per cent a year. That’s a full percentage point less than between 1955 and 1985, when share prices barely rose at all in real terms.

A more plausible reason for the market’s rise is that it has been driven up by fantastic returns on a handful of huge stocks such as Apple, Amazon and Microsoft.

This, however, is not the whole story. The Frank Russell 2000, an index of smaller stocks, has also risen strongly in recent years — albeit not as much as the S&P 500.

One possible reason for this is that bond yields have fallen, causing investors to discount future earnings by less with the result that valuations have increased.

This explanation, however, runs into a problem. Insofar as bond yields have risen because of slower growth, equities should not have benefited at all: lower future dividends should exactly offset the lower discount rate. This poses a danger. Perhaps equities are pricing in good news of lower yields (a lower discount rate) but not the bad (lower growth). They could be doing the opposite of what they did in the 1970s, when they discounted future earnings more heavily because bond yields had risen, ignoring the fact that the same inflation that raised bond yields would also raise future earnings. Recent big falls in the price of Netflix and Peloton after news of weaker-than-expected earnings growth lends credence to this possibility.

It is only to the extent that bond yields have fallen for other reasons that equities should have risen; the most promising candidate here is simply that investors’ time horizons have increased so that they are willing to pay more for long-duration assets, be they long-dated bonds or equities.

US equities have managed to rise in the face of high valuations in recent years because of a rising profit share, the stellar performance of a few companies and because of falling bond yields. Their setback so far this year has coincided with a reversal of that fall in yields. A more interesting and troubling question for equities is: how would they fare if or when the share of profits in GDP turns down?

Chris Dillow is an economics commentator for Investors’ Chronicle

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