Investors’ Chronicle: YouGov, Netcall, Hotel Chocolat

BUY: YouGov (YOU)

The survey specialist has defied concerns over demand with strong sales and profit growth, writes Jemma Slingo.

Investors were nervous that YouGov would bear the brunt of squeezed technology budgets in 2023, and the group’s valuation suffered as a result. The provider of marketing and opinion data has defied the gloom, however.

A key part of YouGov’s appeal is its operational gearing. In recent years, the group has invested heavily in technology, people and panellists, but now its work has become very repeatable and it is able to sell its data sets at ever higher margins. This is evident in its latest results, which show a 9 per cent increase in underlying revenue and a 23 per cent jump in underlying adjusted operating profit. 

Growth in the custom research division has been particularly strong, with sales up by 27 per cent at £122mn and adjusted operating profit up by 31 per cent at £27.5mn. Management stressed that clients are still dedicating money to large-scale, multi-country, multiyear trackers to help them make critical business decisions.

In contrast, demand for data services — which consists of fast-turnaround research — dipped in the period, as research budgets came under pressure. Performance in mainland Europe was particularly weak, as geopolitical conflicts and poor sentiment led to less tactical PR work. This isn’t too worrying, however, given that data services is the smallest and lowest margin part of the company. 

YouGov is optimistic about next year, saying that trading is in line with expectations and momentum from technology sector clients is picking up again. The group also has a major acquisition in the pipeline: it is trying to buy the consumer panel business of GfK for €315mn (£272mn), which it raised via an equity placing. The acquisition is subject to regulatory approval but it is expected to close in the coming months.

Regardless of whether the deal goes ahead, we like YouGov’s profit trajectory and it is encouraging to see sales momentum returning. One thing to keep an eye on is its progress in America, which has been slower than elsewhere in the world and which will be crucial for future growth. Things could pick up as the technology sector recovers, however, and YouGov’s battered forward price/earnings ratio of 15 looks too good to miss.

BUY: Netcall (NET)

The software company could benefit from a shift towards automation as the cost of labour rises, writes Arthur Sants.

Netcall sells software to help companies automate their interactions with customers. Its cloud platform allows companies to build chatbots, sales management platforms and software to analyse their data.

The sales pitch is obvious. At the moment, when salaries are rising companies should be looking to save on labour. Instead, they can use Netcall to build software to boost productivity. And it seems to be popular. Cloud product revenue increased by 55 per cent in the full year to June and total annual contract value was up 15 per cent.

The net retention rate was 113 per cent, which shows that customers are happy to increase their spending on the platform. Netcall also managed to retain its largest S&P 500 customer on a new five-year contract despite that customer consolidating its software suppliers. This is all good evidence of its popularity.

Netcall is investing heavily in the product to boost growth. Research and development costs (including those that were capitalised) were up 22 per cent to almost £5mn — equivalent to 14 per cent of revenue and above the industry average. This kind of investment means return on equity has been below 10 per cent in the past but its returns are increasing as profitability rises.

The share price has fallen almost 20 per cent this year which has brought the forward price/earnings ratio down to 26. Netcall is still expensive, but if it can prove its investment will accelerate growth it could be in for a re-rating.

SELL: Hotel Chocolat (HOTC)

Cost base efficiencies are yet to have a pronounced impact at the chocolate retailer, writes Mark Robinson.

In the last week of June, Hotel Chocolat said that although full-year 2023 was a “transition year to reshape the business in readiness for its next stage of growth”, slower-than-expected benefits from cost base efficiencies meant that the chocolatier would deliver an underlying marginal pre-tax loss. Ultimately, it was a mixed full-year outcome.

Reported profitability was constrained by £1.6mn in restructuring costs and a £3.5mn impairment on the Rabot Estate in St Lucia as tourism numbers have yet to recover after the pandemic disruption. The domestic market was also a source of consternation, with UK revenues down 8 per cent, although store sales were heading in the right direction. To make matters worse, sales from digital and wholesale were down by a quarter.

But as we’re only one year into the group’s “shape of the future” strategy, it may be a question of timing. The group revealed that UK store revenues were up 14 per cent year on year in the 13 weeks to October 2. With four of its planned 12 new store openings already completed, Angus Thirlwell, co-founder and chief executive, confirmed that the “new store format is trading well above our expectations”.

With planned efficiencies to the fore, potential investors would be well advised to monitor the adjusted cash margin. The group said that cash outflows are now significantly better than full-year 2023 due to well-controlled working capital management, although the board felt unable to give clear full-year guidance prior to Christmas. FactSet consensus points to a 13 per cent increase in revenues through to 2025, with a decrease in cost of sales on a proportional basis. That’s encouraging, but we will need to see more evidence that the remedial measures are having the desired effect.