Studio Retail Group — Leading the charge

Studio Retail Group — Leading the charge

Studio’s online and value-based offer produced strong trading during lockdown, with 55% y-o-y product sales growth in the first 11 weeks, which compares very favourably with its online peers. It looks well placed, with tight stock management, as the high street re-commences trading, which is likely to be very competitive. Due to the ongoing uncertainty from COVID-19 and the timing of the Education sale, management is unable to provide guidance for FY21e.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Studio Retail Group

Leading the charge

Trading update

Retail

24 June 2020

Price

225p

Market cap

£194m

Net debt (£m) at 12 June 2020

30

Shares in issue

86.4m

Free float

61%

Code

STU

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Studio Retail Group is a multi-channel retailer operating across the business-to-consumer and business-to-business marketplaces. It is a market-leading value retailer and educational resource supplier in the UK.

Analysts

Russell Pointon

+44 (0)20 3077 5757

Neil Shah

+44 (0)20 3077 5700

Studio Retail Group is a research client of Edison Investment Research Limited

Studio’s online and value-based offer produced strong trading during lockdown, with 55% y-o-y product sales growth in the first 11 weeks, which compares very favourably with its online peers. It looks well placed, with tight stock management, as the high street re-commences trading, which is likely to be very competitive. Due to the ongoing uncertainty from COVID-19 and the timing of the Education sale, management is unable to provide guidance for FY21e.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

PE
(x)

Yield
(%)

03/18

479.6

26.8

25.9

0.0

8.7

N/A

03/19

506.8

28.8

26.5

0.0

8.5

N/A

03/20e

534.5

30.7

29.6

0.0

7.6

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

In the first 11 weeks of FY21, product sales increased by 55% y-o-y, with demand driven by the stay-at-home essentials of toys, fitness and garden products. Demand was driven by strong growth in active customers, which surpassed two million (rolling 12-month basis) for the first time, despite low marketing, and increased spend per customer. Although dilutive for profit margin, the sales performance should produce a higher cash margin. To date, requests for forbearance due to COVID-19 was quantified at 4% of outstanding balances and management is budgeting for it to deteriorate as unemployment increases.

The proposed sale of Education has been delayed, likely into CY21, as the Competition and Markets Authority has referred it to a Phase 2 review. The ongoing closure of schools in the UK is naturally hitting demand, therefore the focus is on managing costs.

The company’s financial position is significantly better than is typical at this time of year: net debt has reduced from £52.3m at the end of March to £30m. The delayed sale of Education will require renegotiation of the revolving credit facility from March 2021.

Due to the ongoing uncertainty from COVID-19, management is still unable to provide guidance for FY21. The results for FY20 will likely be published in the second half of August.

General disclaimer and copyright

This report has been commissioned by Studio Retail Group and prepared and issued by Edison, in consideration of a fee payable by Studio Retail Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Studio Retail Group and prepared and issued by Edison, in consideration of a fee payable by Studio Retail Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Financials

Flatex — Waiting for the regulatory go-ahead

Flatex reported FY19 of earnings €14.9m (-15% y-o-y) and a ROE of 8.6%. Lower market volatility affected the results, as did the costs of expansion into the Dutch market before the decision to acquire 100% of DEGIRO in December 2019 for €60m cash plus €190m in shares. The EBITDA margin was 28.5%, down 16.8% y-o-y. The friendly acquisition of DEGIRO is transformational, with greater scale and breath of products. Management has identified €30m in annual synergies. The deal will make Flatex Europe’s largest retail online broker, present in 18 countries, although it is still awaiting regulatory approval. Although the share price has almost doubled since the announcement of the DEGIRO acquisition, the shares trade at a discount to peers on both P/E and EV/EBIT despite consensus forecasts of above-average growth.

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