Appreciate Group (APP)

Appreciate Group (Formerly Park Group Plc) - Market Cap £65m, Share Price 35p

Background: Appreciate Group is the new name of Park Group a business that went public in 1993. Park was the birth child of Peter Jonson an entrepreneur who created a Christmas savings club and distributed Christmas hampers to low income families. Today, Appreciate Group provides single and multi-retailer vouchers, pre-paid gift cards and digital rewards services to corporate and consumer markets. Appreciate dominates the UK Christmas Savings market with north of 70% market share and has 5% to 6% share in various segments of the corporate rewards and incentives market.

Elevator Pitch

Appreciate Group represents an opportunity to buy a business with a solid history of profitability, cash generation and dividends, available at a significant discount to fair value. Part way through a digital transformation under the helm of a new management team appointed in 2018 when Covid struck. In the year to March 31st 2020 the business reported record gross profits and underlying profits and yet the shares are close to a 10 year absolute low. After a brief disruption from Covid, operational trends are improving. The business had an all-time record December, with Billings growth of 40%+.

There are multiple avenues for the company to surpass 2019’s profitability (distorted by one off costs) but using that as a base the shares are very cheap. £11.4m of Adjusted PBT, ex one-off investment costs (£1.5m) via the P&L to support the digital transformation. Post tax at 20% this should mean at least £9m of conservative ongoing earnings, an earnings yield of 13.8% pre any benefit from the initiatives put in place by the new management team or end market growth.

Using a 10% discount rate there is at least 38% upside excluding any potential growth. This appears harsh in the context of a growing addressable market, an asset light and improving business model, Appreciates history of growth, depressed interest income from a large and growing float and management’s experience.

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Hi Kaizen

Many thanks for the write-up and welcome to the forum.

Never looked at Appreciate (or Park) before. A helpful slide from the latest presentation:

Revenue is earned from service fees from the retailer when the voucher etc is redeemed as well as collecting unused funds from expired vouchers. To be honest I have never seen the point of Xmas savings and gift vouchers (digital or otherwise) when you could just save/gift cash yourself, but maybe I am from the wrong demographic. Mind you, I think overseas customers buying for UK residents and corporate customers buying for employees could make sense. Maybe gift cards have some advantage over cash transfers for these particular customers.

Management is interesting. The chief exec was head of MBNA UK for nine years so presumably knows this industry very well:

Ian was appointed to the Board and became Chief Executive Officer (CEO) on 1 February 2018. He has a strong background in financial services, specifically in banking, payments and card services, having worked at MBNA for 26 years, most recently as Chairman and CEO of MBNA Limited in the UK, a position he held from 2008 to 2017. From 2015 to 2017, he was deputy chair of the UK Cards Association, having been a Board member since 2008, and he was a member of the interim main Board of UK Finance from 2016 to 2017.

For a salaryman boss, I like the SGP arrangement – the shares have to deliver a 10% CAGR over five years before the execs collect any award:

Grant of Strategic Growth Plan awards

The annual LTIP award has been replaced, for the CEO and the CFO, with a one-off Strategic Growth Plan (SGP), which will operate over a five year performance period from 1 October 2018 to 30 September 2023. Regular LTIP awards will not be made to the participants of the SGP during this period.

The SGP will provide participants with a pool of shares with a value equal to 10 per cent of any cumulative shareholder value created above a compound hurdle rate of 10 per cent per annum. The CEO will be allocated a 45 per cent share of the pool and the CFO will be allocated a 25 per cent share of the pool.

Initially, only the CEO and CFO will participate in the SGP. The remaining 30 per cent of the SGP pool will be reserved for allocation to new participants.

An overall cap on the maximum number of shares that can be granted under the SGP is set at 5 per cent of the outstanding share capital at grant to prevent excessive payouts or dilution. This will therefore sit outside of the current share plan limits and therefore be in addition to the current 10 per cent limit that applies for LTIP and SAYE awards. "

Yes, the shares do not appear expensive assuming a return to 2020 profitability and treating the exceptionals as exceptional. I can’t see any obvious accounting reason for the low rating. Provision movements were significant within 2019 and 2020 cash flow statements, but I suppose they can even out over time. So from this quick look, a lot to like from a ‘value’ perspective.

What do you see as the greatest inherent risks to this business? Perhaps further regulation of vouchers and/or retailers withdrawing from the schemes to make the vouchers less attractive to the recipient?