Investors’ Chronicle: Next 15, Phoenix Group, Card Factory

BUY: Next 15 (NFG)

The marketing agency has been affected by delays in client spending — but it is still returning cash to shareholders, writes Jemma Slingo.

The trading environment for marketing companies is not easy at the moment. Next 15 faces difficulties, with organic revenue shrinking by 1 per cent to £286mn in the six months to July 31. The “customer engage” division, which accounts for almost half of group revenues, had the toughest time, with sales down 6.4 per cent due to — you guessed it — client delays. Analysts at Peel Hunt have trimmed their full-year 2024 revenue forecasts by 3 per cent as a result.

Quite what impact sluggish sales had on profitability is not immediately obvious, given that Next 15’s statutory and underlying profits bear little resemblance to one another. However, its adjusted numbers are a good place to start. Adjusted operating profit (after lease interest) fell by 7 per cent to £57mn, while margins edged down from 22 per cent to 20 per cent. 

Macro headwinds played a part here, but management also said that “an encouraging profit performance from the majority of our brands was offset by a tough comparable in relation to the exceptional profit performance from Mach49 in the prior year”. Mach49 is a growth incubator Next15 purchased in 2020, which secured a very lucrative contract early in 2022. 

From a statutory perspective, profits improved in the period, largely due to acquisition-related accounting in 2022. Acquisitions are only just starting to take a toll on the balance sheet, however: while Next 15 remains very cash generative, it paid £52.6mn of acquisition-related liabilities and staff bonuses in the half, pushing down its cash reserves and pushing up its net debt (excluding lease liabilities).

Management is clearly still feeling confident, however, announcing a buyback programme of up to £30mn. Whether this is a sensible decision remains to be seen. 

Despite its cyclical exposure, we still like Next 15 and think — given its reliance on US tech sector clients — that it is proving fairly resilient. It is still unclear when economic conditions will improve and marketing will pick up again but, with a forward price/earnings ratio of just 6.8 compared with a five-year average of 13.6, it is going extremely cheap.

HOLD: Phoenix Group (PHNX)

An indifferent set of results and an unfortunate private equity stake puts Phoenix insurance under pressure, writes Julian Hofmann.

There have undoubtedly been few better times to invest in private equity — valuations are cheap as interest rates have harrowed the sector — but the timing of Phoenix Group’s purchase of a 5 per cent stake in PE firm Hambro Perks, a few days before the Financial Conduct Authority announced a wide-ranging investigation into valuations the sector reports, could hardly have been worse.

This follows on from accounting changes under IFRS 17 that could make the kind of expansive closed book buying that the company specialises much harder under a regime that is stricter on solvency levels.

In fact, most of the news away from the half-year results contained an element of unfortunate timing, and not just for Phoenix. For example, the company is part of the so-called Mansion House Compact which also includes L&G, Aviva and Scottish Widows. The group recently pledged to invest at least 5 per cent of its defined contribution default funds in unlisted assets, which would include things such as private equity, though it is worth pointing out that the pledge is non-binding.

These mis-steps aside, the half saw the balance sheet increase its positive levels of cash generation with £885mn of new business cash rolling in, more than double the total at this point last year, which comfortably covers the dividend by three times.

Broker Berenberg makes the point that the key for Phoenix is its A+ credit rating from Fitch that allows the company to borrow at reasonable rates. Management has options over whether to deleverage or continue buying, the broker said. With dividend yield now 10 per cent, the market is demanding more surety for risk.

HOLD: Card Factory (CARD)

Card Factory delivered a surge in half-year statutory profits, but there may be difficulties ahead, writes Mark Robinson.

Chief executive Darcy Willson-Rymer warned that Card Factory, though well positioned, faces a “challenging economic backdrop in the run-up to the Christmas trading season”.

The festive season is central to the company’s financial prospects, but the specialist retailer of greeting cards and gifts can certainly point to progress across its stores. Revenue here increased by 10.5 per cent on a like-for-like basis with management highlighting improvements in “store range and layout developments and the annualisation of targeted price increases”. From a product perspective, sales of gifts and celebration essentials led the way, although greeting cards also registered positive sales growth.

By contrast, financial results were set back by a 13.1 per cent contraction in like-for-like online sales. The company indicated that this was to be expected given the “continued rebalancing of retail sales between online and in-store across the sector”. The negative trend is expected to continue over the second half, and it is far from clear when the transition to an “omnichannel” offering will gain traction.

Partnerships form part of that transition, an effective refocusing of the sales channels, and they have proved rather more successful in the period under review. Excluding the contribution from newly acquired SA Greetings (completed in April 2023), partnership sales were up by 23.5 per cent to £4.2mn.

Trading since the August 2023 update has been in line with expectations and the board has expressed confidence in the ability of the company to achieve the long-term financial and operational targets set out at its Capital Markets Strategy Update in May 2023. The lowly forward rating of eight times consensus earnings reflects the question marks hanging over the business despite the respectable interim out-turn.