Investors’ Chronicle: Frasers, Hyve, On the Beach

BUY: Frasers (FRAS)

Premium lifestyle arm is the fastest-growing part of a sprawling retail empire, writes Michael Fahy.

Mike Ashley, the founder and majority shareholder of retail group Frasers, may now have handed over operational control of the business to son-in-law Michael Murray, but the freewheeling trader spirit he embodied still seems alive and well.

For instance, it’s only been six weeks since the company’s first half ended and in the intervening period it has rescued Savile Row tailor Gieves & Hawkes, increased its holding in designer label Hugo Boss to about 34 per cent — mainly through the sale of put options — bought homewares brand Amara Living, and paid £15.8mn for the Coventry Building Society Arena. It then served tenant Coventry City Football Club with an eviction notice, which seems like it will be enforced unless the club signs a new licence agreement on terms it deems to be less favourable.

The first three deals make some sense, but why the company should get involved in the latter is unclear. It is already facing a big enough challenge in taking a sprawling a retail empire that encompasses discount sports shops, department stores and fashion boutiques upmarket just as a recession looms.

Murray’s “elevation strategy” seems to be working so far, with the rollout of its Flannels stores helping to bump up revenue at its premium lifestyle arm by 25 per cent year-on-year, making it the fastest-growing part of the business. Unlike in other parts of the group, the bulk of this was organic, too.

The group’s gross margin fell by 270 basis points, though, to 42 per cent, which it said was partly due to cost of goods inflation and maintaining higher stocks, as well as the lower margin made by the recently-acquired online retailer Studio and the cost of shutting more House of Fraser stores.

Despite the tougher trading environment, the company maintained guidance given six months ago that it will make an adjusted pre-tax profit of between £450mn-£500mn, which at the top end would represent a 45 per cent uplift on the £345mn earned last year.

Frasers’ share price fell by 9 per cent but is still up 15 per cent year-to-date. The shares trade at 11.8-times consensus forecast earnings, well below their five-year average of 16.5-times.

The company will have to fight for customers as disposable incomes weaken but it sources keenly, prices keenly and will no doubt be in the running to pick off more prized assets if competitors throw in the towel.

HOLD: Hyve (HYVE)

The sale of businesses in Russia and Ukraine resulted in a £46mn loss on disposal, writes Jemma Slingo.

Reading Hyve’s annual results is hard work. The accounts are filled with restatements, adjustments and discontinued operations, making it difficult to unearth what is going on at the international events company.

If headline figures are to be believed, everything is rosy. Revenue overtook pre-Covid levels in the second half of 2022, orders are strong, and event numbers are rising fast. This excludes a number of important factors, however.

First, China. Before Covid struck, more than 10 per cent of Hyve’s revenue and 19 per cent of its adjusted profit before tax came from India and China. In 2022, less than 5 per cent of turnover from continuing operations came from Asia, and the region reported a loss of £2.1mn. Given the Covid situation, recovery could be a long way off.

Second, Russia, which used to account for almost 30 per cent of Hyve’s total sales and half of group profits. However, when Vladimir Putin invaded Ukraine, Hyve had to get rid of its Russian business fast. This resulted in a loss on disposal of £38.3mn — above management’s £27.5mn estimate. While Hyve could receive an earn out consideration of up to £72mn over the next 10 years, it’s unclear when or if it will see the money.

Management argues that the shift away from Russia and China — as well as the disposal of businesses in Turkey and Indonesia — is part of its transformation plan. The group is actively turning its back on emerging economies and cementing itself in the West. However, it is still unclear how Hyve will replace these formerly profitable areas of the business.

Meanwhile, continuing operations need close scrutiny. In 2022 and 2021, Hyve reported large statutory losses and adjusted them into profit. Adjusting items totalled £42.4mn this year, and included amortisation of intangible assets, impairments, transaction costs and revaluations.

Moreover, goodwill and intangible assets form 70 per cent of the group’s asset base. Given the amount of chopping and changing that has happened over the past few years — particularly relating to the revaluation of assets and liabilities — this makes us uneasy.

There is plenty to feel optimistic about. Events in the West are clearly picking up, and the group has noted strong forward bookings of £98mn, compared with £67mn the year before. However, a run of statutory losses, big adjustments, and losses upon disposal do not inspire confidence.

HOLD: On the Beach Group (OTB)

The departure of the travel group’s chief executive has kept market reaction muted despite financial progress, writes Jennifer Johnson.

Logic would suggest that the cost of living crisis would curtail demand for beach holidays. According to On the Beach Group’s full-year results, it has — but not across every segment of the market.

Sales of the company’s five-star holidays were up 82 per cent on 2019 levels, while sales of three-star packages were down 18 per cent. Consequently, the company’s average booking value was 31 per cent higher than in 2019. It estimates that the premium holiday segment is worth 2.5 times more than its “value” segment.

On the Beach also closed out its financial year in a net cash position, which broker Peel Hunt notes provides “firepower for marketing, low-deposit bookings and offering fast-track security and lounge access”. The group has already invested £4.8mn in providing these holiday perks to customers in 2022.

Economic headwinds aside, On the Beach said it has started its 2023 financial year with a “healthier overall forward order book” than the equivalent period in 2020, before Covid spread globally. Although management acknowledged that it is unclear how continued cost of living pressures will impact consumer behaviour, it asserts the company is “favourably” positioned for growth in 2023.

Despite a decent set of results, investors have not embraced the company, with the shares falling nearly 10 per cent on results day. The likely reason for the frosty reception is the announcement of founder and chief executive Simon Cooper’s forthcoming departure. The firm’s current chief financial officer, Shaun Morton, has been selected by the board to step into the top job.

Peel Hunt analysts said that the group’s booking figures are “promising”, but this early stage of the company’s new financial year means it is too soon for forecast upgrades. We’re inclined to play the waiting game too.