Halfords Group — A service-led proposition

Halfords Group — A service-led proposition

Halfords has a compelling, differentiated brand strategy that will help it continue to grow its core Motoring and Cycling market shares. Services remain at the heart of the business and investment in this area is expected to accelerate. With earnings expectations now reset and management outlook understandably cautious, we believe that investor focus will now be on the new CEO’s strategic update in September.

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Halfords Group

A service-led proposition

General retail

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25 May 2018

Price

325.4p

Market cap

£646m

Share price graph

Share details

Code

HFD

Listing

LSE

Shares in issue

198.6m

Business description

Halfords Group comprises two reportable segments: Retail, 86% of group revenue generated via 480 stores in the UK and ROI and a website, selling motoring and cycling products; and Autocentres, 14% of group revenue generated via 316 UK centres offering car service, repairs and MOTs.

Bull

Opportunity to take share from independent retailers in the motoring and cycling markets.

Continued growth in higher-margin service-related Retail sales; a key differentiator for the business.

Further declines in new car registrations supporting demand for Autocentre services.

Bear

Risk of further gross margin pressure due to FX, input cost inflation or supply disruption.

Risk of sales being affected by changes to key government policies (eg Cycle to Work).

A lack of continuity in senior management.

Analysts

Kate Heseltine

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3077 5700

Halfords has a compelling, differentiated brand strategy that will help it continue to grow its core Motoring and Cycling market shares. Services remain at the heart of the business and investment in this area is expected to accelerate. With earnings expectations now reset and management outlook understandably cautious, we believe that investor focus will now be on the new CEO’s strategic update in September.

Mitigating FX headwinds

Halfords FY18 results delivered 3.7% (2.0% l-f-l) group sales growth and PBT of £71.6m, a 5% decline y-o-y, in line with consensus expectations. Notably, the company substantially offset a c£25m increase in Retail input costs resulting from weaker sterling through supplier negotiations, pricing and operational efficiencies. Retail l-f-ls of +2.3% benefited from the sale of car parts, new tech items, such as dash-cams, and associated fitting services, while lower cycle sales volumes y-o-y, unsurprisingly affected by bad weather, were more than offset by price rises.

Investing in the service-led retail proposition

The arrival in January of new CEO Graham Stapleton, and the upcoming changes of chairman and CFO meant the FY18 results were not the time for a full strategic update. One clear message is that services remain at the heart of the business. During FY18, service-related Retail sales grew by 14.2% and management expects to accelerate investment in staff training, marketing and customer data collection in FY19. Detail on the next stage of growth will be provided in September 2018.

Resetting earnings expectations

Growth prospects for the cycling and motoring markets look upbeat and Halfords appears well positioned to continue taking share from smaller independent competitors. However, management has stated that it expects FY19 PBT to remain broadly flat y-o-y due to FX hedges delaying the benefits from recent sterling appreciation until FY20, lower anticipated bike price rises and accelerated investment in services. This represents a c 5% reduction in FY19 consensus PBT.

Valuation: Shares de-rated, attractive yield

In our opinion the shares appear oversold following the results. Although the detailed strategy is yet to be unveiled, the company has solid foundations with scope to grow market share. It continues to generate strong FCF, supporting an attractive dividend yield. Lease adjusted net debt/EBITDAR remains flat y-o-y at 4x.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/17

1,095.0

75.4

30.3

17.5

10.7

5.4

03/18

1,135.1

71.6

29.6

18.0

11.0

5.5

03/19e

1,159.3

75.4

30.8

17.9

10.6

5.5

03/20e

1,191.2

80.0

33.1

18.5

9.8

5.7

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

Disclaimer

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. . This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: TMT

EQS Group — Investment on plan

EQS’s Q118 report shows performance in line with expectations, with 13% top-line growth and higher investment pushing the group into an EBITDA loss. All is on track for a Q418 launch of the new COCKPIT web-based product platform and our forecasts for FY18e, FY19e and FY20e are unchanged. New KPIs and segmental reporting highlight a strong recurring revenue base and will clarify the growth dynamics of customer numbers and associated revenues. EQS’s markets remain attractive, with corporate obligations become more numerous and complex, underpinning the rating.

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