Investors’ Chronicle: JD Sports, James Cropper, Telecom Plus

BUY: JD Sports Fashion (JD.)

Acquisitions helped boost revenue, as the company gets to grips with regulatory matters, writes Christopher Akers.

In its delayed full-year release, JD Sports Fashion announced record profits and a robust margin performance, in a year marred by Competition and Markets Authority (CMA) investigations and corporate governance concerns.

A governance overhaul is in progress after chief executive Peter Cowgill’s departure in May. The CMA fined JD Sports £4.3mn in February over corporate governance irregularities relating to the attempted purchase of smaller rival Footasylum. A £2mn provision has also been recorded due to the regulatory body’s ongoing investigation into the sale of replica football shirts.

But this does not obscure an impressive financial performance. The top line was helped by recent acquisitions, with revenue up almost sevenfold to £390mn at retailer Shoe Palace, while footwear business DTLR generated £383mn in revenue since in the 46 weeks post-acquisition period. Sales at the JD UK and Ireland business, meanwhile, were up by £508mn to £2.3bn.

Gross margin rose by 110 basis points to 49.1 per cent, boosted by performance in the US, where the margin soared by 310 basis points to 49.8 per cent and where demand was helped by the government’s fiscal stimulus.

Quilter Cheviot equity research analyst Mamta Valechha said that the results “should offer a lot of reassurance, given no accounting issues, with the delays due to taking additional time to properly finalise the corporate governance workstreams”.

The shares are relatively inexpensive — Peel Hunt analysts have them trading at a mere eight times forward 2023 earnings. Recent trading has been strong, with like-for-like sales up 5 per cent between the results and June despite cost of living pressures, and progress on governance is encouraging.

SELL: James Cropper (CRPR)

Last year, government handouts kept the paper and other material manufacturer in the black, this time its technical fibre products unit was able to do the job, writes Alex Hamer.

James Cropper’s high-tech materials division has papered over cracks as the company saw sales come back to pre-pandemic levels but with profits not yet following, as high energy costs begin to bite.

The company is a paper and cardboard packaging producer primarily, but also has a division making aerospace and hydrogen fuel cell parts. This was the only profitable division in the 12-months to March 26, with an operating profit of £8.7mn. This was the same last year, although the paper division’s operating loss widened between 2021 and 2022, from £309,000 to £2.3mn. 

Cropper chief executive Phil Wild said the paper division’s power costs had gone up 70 per cent compared with the 2020 financial year. Wild added that fixed energy prices for the company’s first quarter and a surcharge being handed to customers was “mitigating the impact over the medium term”. 

Higher spending was also a theme in 2022 — the company more than doubled its capital expenditure to £6.8mn to increase capacity, although deferred expansion plans could account for this jump.

When we last covered James Cropper in 2019, we flagged its high pension liabilities and input cost volatility as a reason to stay away. The former has come down since — thanks to pension payments being £4.8mn less than expected in the year — but the latter has remained an issue, cutting into operating profits, the margin for which remains a measly 3.5 per cent. We remain bearish on the company.

HOLD: Telecom Plus (TEP)

The cost of living crisis is benefiting demand for the utility services provider, which trades under the Utility Warehouse brand, writes Christopher Akers.

Telecom Plus is a cost of living crisis winner. The utility services provider, which trades under the Utility Warehouse brand and offers bundled packages across the energy, communications, and insurance markets, has seen robust growth in customer numbers as consumers cut costs where they can and are attracted by the company’s tariffs and pricing.

Co-chief executive Andrew Lindsay told Investors’ Chronicle that we are now in a “new normal” of higher energy bills and that this would support demand for Telecom’s services over the medium to long term.

Customer numbers rose by 11 per cent in the year to 729,000 and the company expects these to grow by a fifth in 2023. Management is now aiming to add 1mn new customers to Telecom’s books in the next five years, a target which comes in above Numis’ growth forecast.

The impact of customer growth was apparent in the top-line energy revenue for the year, with electricity sales up by 15 per cent to £451mn and gas up by almost a fifth to £296mn. Telecom is also well positioned to deal with a new regulatory landscape — Ofgem has published proposals meant to safeguard the energy market from a repeat of the catastrophic supplier collapses of recent times.

While energy took 77 per cent of total revenue in these results, the business has more to offer. Landline and broadband sales fell by 2 per cent to £130mn, and mobile sales were up by 10 per cent to £45mn. Telecom was only authorised as an insurance broker in 2020, but Lindsay said that insurance “should be a material growth driver moving forwards”. The company’s Cashback card, which offers various savings, has grown to be one of the major UK prepaid cards and this looks set to benefit further from the cost of living crisis.

Peel Hunt analysts said that the company “is at the early stages of a multiyear growth opportunity — and we see the potential to double customer numbers and treble profits”. The house broker has the shares trading on 25 times forward 2023 earnings, which isn’t particularly cheap. But against this sits rising customer numbers, strong cash generation, and an improving outlook — Telecom has hiked its adjusted profit before tax forecast to £75mn for next year and expects to raise the full-year dividend by at least 14 per cent. Last November, we recommended locking in profits and selling the stock. But the world has changed a lot since then.