The Pebble Group — Two distinct businesses in one

The Pebble Group consists of two complementary businesses operating within the large and fragmented promotional products market. This is valued by industry body the Advertising Specialty Institute (ASI) at $26bn in North America and estimated to be worth around the same amount in Europe. Facilisgroup is the smaller of the two businesses in revenue terms, but roughly matches Brand Addition’s contribution at the EBITDA level. It has a SaaS business model and equips its Partners (customers) with the software and systems needed to run their digital commerce operations efficiently, designed specifically for the industry, so meeting the needs for personalisation and complexity in individual orders. It also operates a pre-qualified preferred supplier roster, where Partners can benefit from improved pricing and rebate structures. Brand Addition is a longer-established business and works with global brand owners to support their needs for branded product for internal and external requirements. Both businesses take their responsibilities for ethical sourcing very seriously, to protect their own and their clients’ brand integrity.

With two distinct businesses with very different operating models, it makes most sense to value these separately and then look at the sum of the parts. For Facilisgroup, we have used a selection of North American SaaS businesses across multiple industry segments, with market capitalisations of less than $1.5bn, and for Brand Addition, we have used a peer set of UK-listed marketing service companies. Based on EV/EBITDA averaged across FY24 and FY25, Facilisgroup accounts for the larger proportion of group valuation at 64% pre-central costs. At a group level and including the current year EV/revenue metric, which favours Brand Addition, we derive a valuation of 92.2p were the Pebble shares to be valued at parity to peers. We have also looked at a DCF, using a WACC of 13.0% and terminal growth of 2% and assuming a relatively steady build of EBITDA margin as the proportion of the Facilisgroup contribution to the total builds. This indicates a value of 86.8p, close to that implied by the current industry multiples.

To understand the financial dynamics of Pebble, it is necessary to understand those of the two underlying businesses. Facilisgroup is the younger of the two and to date has been largely concentrating its efforts on bringing its service and product offering to market, first with its now established Syncore product, described below, then adding new revenue-generating products and services that increase its addressable market. Brand Addition works with large, global brands, with high levels of client retention. In November 2023, Pebble put out a trading update reporting that Brand Addition’s revenues were below plan and prior year, due to a downturn in demand from clients across the tech and consumer sectors. FY23 results were in line with the revised expectations. We have been cautious in our modelling of revenue recovery, given the continued macro uncertainties, although there are some signs across the industry that the widely publicised tech downturn is now correcting. The group has a robust balance sheet, with £15.9m of net cash at the year-end (excluding leases). The FY23 dividend was doubled to 1.2p and the planned share buyback of up to £5.0m of stock is now set to go ahead following approval at the recent AGM.

The key group sensitivity is the general macroeconomic environment, although the promotional products market is reasonably resilient (Exhibit 7, below) because of its utility as an advertising medium. Facilisgroup’s SaaS business model should be tolerant of short-term fluctuations and Partner retention is high. Brand Addition has some sensitivity to sector verticals, as seen in Q423, but generally has good diversity by sector and geography, with 60% of revenues derived from Europe and 20% from the US in FY23. Supply chain management is crucial across the group and good management here should also help mitigate reputational risks. Our financial modelling assumes a successful roll-out of Facilisgroup’s new Commercio offering, with full transition to paying Partners and there is obviously some execution risk here. The group transacts much of its business in other currencies, including the US dollar, euro and Chinese renminbi, but reports in sterling, so there is inherent currency risk.

The Pebble Group provides digital commerce, products and related services to the global promotional products sector. It consists of two separate but complementary enterprises: Facilisgroup, which is a SaaS business, supporting North American distributors of promotional goods with digital commerce technology; and Brand Addition, which supplies global brands, under contract, with promotional products and related services.

The original business was founded in 1986, with Brand Addition established by current management from three businesses within 4imprint in 2010. This was then bought out by management, supported by private equity (PE), a couple of years later. In 2014, Brand Addition extended its operations into China, followed in 2016 by the expansion to North America with the acquisition of Gateway CDI, which then became Brand Addition North America. There was a secondary PE-backed management buyout the following year, and the purchase of Facilisgroup in late 2018. It was at this point that The Pebble Group was set up, giving a group setting for these differentiated businesses operating within the large promotional products sector.

The Pebble Group was admitted to the AIM market in December 2019, via a placing of 129.0m shares at an issue price of 105p, of which 75.4m were new shares, raising £79.2m of capital for the group. The group’s management team held c 10% of the group’s shares at IPO and all board directors have only added to their holdings since listing.

While Brand Addition accounts for the larger proportion of group revenue (Exhibit 1, above), the adjusted EBITDA is more evenly distributed, reflecting the differentiated business models. We therefore describe and appraise them separately below, adding a group perspective where relevant.

Facilisgroup is the younger part of the group and the faster growing. It aims to be the industry leader in digital commerce, providing a combination of products that offer the full suite of technology required for entrepreneurial promotional products distributors to professionalise and grow. To do so, it provides technology solutions and a digital commerce platform to smaller and medium-sized distributors of promotional products in North America. These will typically be generating between $2m and $20m of revenue a year. It describes its customers as ‘Partners’, which epitomises the nature of the relationship. As at the end of FY23, Facilisgroup had 242 SME Partners, up from 225 at the start of the year. This had reduced to 236 by 18 March, reflecting three that were acquired by non-Facilisgroup Partners and three that had churned, although these latter were considerably smaller, generating an average GMV of $1.5m, compared with the continuing Partners’ GMV of $6.0m. Facilisgroup also operates a network of over 100 preferred suppliers in North America on terms (pricing and rebates) advantageous to those Partners, with effective pre-qualification on product quality and reliability.

The business provides:

Revenues are derived from either SaaS subscriptions for the technology and/or the online stores, and fees for supply chain management. These revenues are repeatable and recurring by their nature, with 95% of FY23 revenues defined as recurring (FY22: 93%).

The original SaaS platform, Syncore, provides all the functionality that its Partners need to conduct their operations, summarised in the graphic below. It continues to generate most of the divisional revenues. Syncore is built on an open API, that enables it to be integrated with external software.

In June 2022, Facilisgroup formally launched Commercio, an online stores solution for promotional product distributors. This enables the creation of both permanent ‘Company Stores’ and ‘Pop-up stores’ to cater for events, establishments, or teams, paid on a flat-rate, monthly fee. While there are many general e-commerce software solutions available, Commercio is specifically tailored to its market, prioritising aspects such as personalisation and complex order submissions. Partners can also often have multiple storefronts addressing different target customers. For the distributor, integration with the existing Syncore offering enables a friction-free process from order to fulfilment, with all the necessary paperwork documented along the way.

During 2023, Facilisgroup introduced (in beta form) an alternative order workflow product designed to meet the needs of smaller distributors; it had 45 (non-paying) customers at the year-end. This is targeted to contribute modestly to revenues in FY24, building thereafter. Importantly, it means that all relevant constituents of the market are addressed, with the exception of the largest potential customers, which are most likely either to have their own bespoke solutions or to be very demanding on pricing.

There are effectively two levers to drive growth at Facilisgroup: increasing the number of Partners/customers, so increasing the addressable market and penetration into the c 21,600 distributors of relevant scale identified by management; and increasing the ‘attach rate’. The attach rate is the proportion of annual recurring revenue (ARR) to the GMV conducted across the platform, with ARR accounting for around 95% of segmental revenues. This can be managed through driving up the proportion of business transacted with the company’s preferred supplier base, or through up- and cross-selling additional products and/or services.

With the heavy lifting of platform and product development now past, management efforts are increasingly focused on building the level of ARR, with $50m targeted, albeit on an unspecified timescale, but likely to be beyond our specific forecast horizon.

Brands need to promote themselves to both internal and external audiences. The strategic use of promotional products can help them to highlight their values and culture and to build connections. Brand Addition manages these programmes for global brands, under contract. It designs creative and sustainable products and product ranges, hosts client-branded e-commerce platforms, and provides international sourcing and distribution solutions throughout Europe, North America and Asia. Its headquarters are in Manchester and it has locations in Europe, the US and Asia. Customers are drawn from a wide variety of industries, including beauty, FMCG, technology, automotive and engineering, financial and professional services and the charity sector. Customers include Google, Nespresso, Scania, Heineken, Mars and Aviva.

Brand equity takes time to build but can be damaged in an instant, so it is vital that a supplier such as Brand Addition is mindful of its position of trust. Brand Addition’s offering falls into two key elements: Corporate programmes and Consumer promotions.

Under its Corporate programmes offering, Brand Addition provides products, supported by a suite of complex services, to develop stock ranges of promotional products for its global clients to highlight their brands and drive revenues. These programmes are typically provided on a three- to five-year framework contract, with the following key elements:

Brand Addition focuses on global corporate clients that require a full suite of capabilities, including account management, design, quality control, webstores, ethical sourcing and global distribution. Brand Addition funds the working capital requirement of these services and invoices clients at the point of despatch.

Within the Consumer promotions offering, Brand Addition is the single or a preferred supplier to its clients, which use bespoke branded products that are gifted to customers alongside the purchase of the client’s retail products, to support one-off promotional activities. Again, Brand Addition will design and sample products for clients, and then sources the products, ensuring compliant, ethical and quality controlled global manufacturing. Brand Addition arranges the distribution of products to its clients' own networks, where they are then packaged with the client’s own retail goods to be gifted alongside the purchase.

Contracts with clients are negotiated on a framework basis and under these contracts Brand Addition will supply numerous campaigns each year.

Brand Addition has a very successful record of long-term client retention, with all the top 10 clients in FY22 continuing their relationships in FY23. The focus for FY24 is on retaining these relationships and successfully implementing the contracts won during FY23, as well as increasing the level of business transacted, for example by extending into new territories.

The group’s positioning as a trusted supplier with strong ESG credentials, efficient technology capability and leading creative skills is a very positive calling card. Individual relationships, though, can be the key to winning new business as people move employers.

Having seen a step up in gross margin in FY23 to 34.1% (the average across FY18–22 was 29.9%), management views a figure in excess of 33.0% as sustainable.

The group strategy is effectively the sum of the two strategies of Facilisgroup and Brand Addition. Facilisgroup has been the focus of investment to date as the suite of product offerings has been developed and brought to market. As these mature over the next few years, it will still require funds to continue to drive Partner recruitment, but this is more of an operational expense.

The management team (details in the section below) is deeply embedded in the industry, with an extensive network of contacts. Potential M&A opportunities for complementary businesses are therefore regularly evaluated, as would be expected in a fragmented market. Vendor price expectations remain elevated, though, and no potential deals have been compelling over recent years.

In the absence of such opportunities, management has instigated a share buyback programme of up to £5.0m, now approved at the AGM, alongside the progressive dividend policy.

CEO Chris Lee has been with the group for 23 years, driving the two buyouts in 2012 and 2017 and leading the listing of the group on AIM in December 2019. He also engineered the purchases of Gateway CDI (which formed Brand Addition North America) in 2016 and Facilisgroup in 2018. Following the departure of the previous chair, Richard Law, at the April 2024 AGM (due to his growing private sector business commitments), Chris has also temporarily taken over as chair while the search for a new non-executive chair is undertaken. There will be no additional associated remuneration during this period.

The group CFO is Claire Thomson, who joined 15 years ago and took over as CFO ahead of the management buyout in 2012. Prior to joining Brand Addition, as it was before the formation of The Pebble Group, Claire was at PricewaterhouseCoopers.

The operational team at Facilisgroup is currently headed by Chris Lee while a replacement is sought for the president, Ashley McCune, who left the group on good terms in October. Karl Whiteside leads the team at Brand Addition. He joined in 2017, having held senior roles at Staples Promotional Products, a major player in the North American markets particularly in corporate programmes. The operational management team has recently been further strengthened with the appointment of a chief product officer at Facilisgroup and a global marketing director at Brand Addition, both new roles.

The group’s management team held c 10% of the shares at IPO and all board directors have only added to their holdings since listing. Management is additionally incentivised through an annual bonus scheme based on an adjusted EBITDA target, capped at 100% of salary. 52.2% was paid out in respect of the FY22 performance (FY21: 42.5%). For FY23, no bonus was paid to management under the scheme, as the operating profit target (changed from an adjusted EBITDA target) was not met, reflecting the trading update published in November. From FY24, payout will be based 85% on operating profit performance and 5% on each of net promoter score, employee engagement and Brand Addition’s EcoVadis rating. Fuller details of the bonus scheme are set out from page 88 of the FY23 report and accounts.

There is also a long-term incentive plan in place, with targets based on earnings per share and total shareholder return. For the three years to December 2026, these shares vest as follows:

Based on our current modelling, Pebble would need to deliver an adjusted EPS of 5.8p for FY26 for this first element to trigger.

There has been plenty of research over the years about the efficacy of promotional products as a marketing tool, particularly when combined with other tools for brand awareness, such as advertising. North American industry body ASI cites 86% recall rates for advertisers that gave out promotional gifts, while Promotional Products Association International (PPAI) research shows that 94% of respondents liked getting promotional products, with three out of four kept simply because they are useful.

The promotional products industry is a highly competitive landscape, but the distributor participants are predominantly small and locally active. The most thorough statistics are available for the North American market, estimated by the PPAI to be valued at around $26bn in FY23, with management estimating that the aggregate size of the European market is a little smaller and the global market is worth in the order of $50bn. Overall sales by North American distributors are thought to have increased by 1.2% in 2023, with the fourth quarter broadly flat, which is well below 2023 real GDP growth of 2.5%, with inflation for the year at 3.4%. Some of this will be the trickle down from the lower spend by the tech sector, with a further impact from faltering corporate confidence.

The largest participant in the North American market, in terms of FY22 revenues (FY23 revenues for the relevant participants are not yet all available), was 4imprint (a client of Edison Investment Research). It does not operate within the corporate programme or large consumer product markets. The second largest distributor is HALO Branded Solutions (FY22 revenues: $1,000.7m, +22.5% yoy; owned by TPG Capital), which supplies branded merchandise, corporate apparel, uniform programmes, and recognition and incentive solutions to (often large) corporate customers. Third largest by sales was Staples Promotional Products (FY22 revenues: $888.2m, +20.0%; owned by PE firm Sycamore Partners). Staples has a markedly different business model based on regional field salesforces travelling around the client pool. It is particularly heavily weighted to corporate programmes.

Custom Ink (with FY22 revenues of $800.0m, +22.6%) started out as a customised T-shirt business where people uploaded their own designs, and now has a substantial product offering. Proforma (FY22 sales: $620.0m, +14.6%) has a franchise-based business model based on printing, design and brand promotion. BDA (FY22 sales: $422.2m, +22.4%) has a strong franchise in licensed sports-affiliated merchandise.

There are a number of sensitivities that could affect the financial performance of the group. These include:

Because of the nature of the group, with two distinct businesses with divergent models, a sum-of-the-parts approach is the most obvious valuation methodology. We have therefore looked at Facilisgroup in the context of US-based SaaS companies valued at under $1.5bn as a reasonable proxy. The peer set for Brand Addition that we have chosen is UK-listed marketing services companies, admittedly not a perfect fit, but the peers at least derive the bulk of their income from the marketing budgets of major global brands.

We compare Facilisgroup with a wide range of US-listed companies with B2B SaaS revenues. We use the median as the better benchmark to give less weight to the more extreme existing valuations. Over the year-to-date, the mean share price performance of this cohort has been a fall of 9%, with a median reduction of 7%.

As the Facilisgroup business is generating a clearly positive adjusted EBITDA, we regard this as a better arbiter of value than revenue. Using the median valuation multiples for FY24 and FY25 implies a valuation for Facilisgroup of £102.8–104.1m.

We have then repeated the exercise for Brand Addition, having slightly expanded the list of comparators to give a fairer picture of valuation across the UK media sector (excluding the largest constituents by market capitalisation). Share price performance in the year-to-date has been mixed, with a median gain of 9% as at 1 May. Using the median valuation for EV/EBITDA, we derive a valuation range of £53.3m to £61.2m, showing that Facilisgroup now clearly accounts for the majority of the group’s combined valuation.

Having established appropriate valuation frameworks for the two businesses, we then combine them, with an adjustment on the EV/EBITDA multiples (at the current UK media sector aggregate level) to take account of the central overhead.

The resultant valuations fall into a relatively tight range and average 92.2p. This is slightly ahead of the 89p fair value that we published at the time of the results in March, reflecting an improvement in the performance of the US SaaS stocks that we are using as comparators, which slightly offsets the slightly weaker showing by the UK media sector.

We have also carried out a DCF analysis on The Pebble Group.

In the FY23 report and accounts, Pebble uses a WACC of 13.2% in appraising the value of its intangible assets (higher for Facilisgroup, lower for Brand Addition). On our modelling, using a WACC of 13.0% and terminal growth of 2% and assuming a relatively steady build of EBITDA margin as the proportion of the Facilisgroup contribution to the total builds, we derive a value of 86.8p, 6% below that implied by the current industry multiples as shown above.

Both these methods produce values well in excess of the current share price of 58p.

At its simplest, The Pebble Group combines:

Because of these differentiated characteristics, it makes sense to look at each separately and then make additional comments at group level.

Facilisgroup revenues are driven by the growing numbers of Partners, the GMV that those Partners transact and how these revenues translate into revenues for the business. This is through the payment of subscriptions, or payments for additional paid-for products and services. Facilisgroup defines this as the ‘attach Rate’ to the group, being the percentage of revenue achieved to the GMV, as shown below.

There are effectively two levers with which to grow the top line. Firstly, to increase the number of Partners to encourage a greater flow of GMV through the business and, secondly, to increase the attach rate. The Partner retention rate of 97% for FY23 is stated including those Partners that had been taken over in the period. Stripping these out, the number rises to 99%, with minimal actual churn. In FY24 up until 18 March, the number of partners was down a net six, being two new, five that had been acquired and churn of three, albeit that these three were at the smaller end of the scale, with GMV averaging $1.5m against a portfolio average of $6.0m.

Our modelling assumptions are for a steady build in Partner numbers and for a relatively stable attach rate, but the balance between these two factors may be revised when we see more evidence of the success of the newer products and services coming through. Management’s aspiration is for ARR to build to $50m, although, importantly, there is no timeframe for this, with an increased attach rate accounting for the majority of the increment. Facilisgroup’s recurring revenue accounted for 95% of the total in FY23 (FY22: 93%).

At the adjusted EBITDA level, margins took a modest dip in FY23 from 54.2% to 49.7% as the group invested in its team ahead of the planned scaling of the business, having averaged 55.9% over FY19–23. There was also (unquantified) spend on providing community events for Partners to add to Facilisgroup’s utility and value proposition to its market. We would assume that this is an ongoing but variable cost. Our modelling suggests a gentle accretion in the adjusted EBITDA margin, and this may prove overly cautious, depending on the investment levels needed to complete and market the extended product suite. With propositions in place that should meet the needs of distributors of varying scale, we would anticipate that Facilisgroup’s adjusted EBITDA margins should be able to move ahead more strongly from FY26.

These higher levels of capitalised product development cost show through in an increased segmental depreciation and amortisation charge of £4.4m for FY23, up from £3.6m, partially offset by a lower share-based payments charge. The resultant operating margin was 24.6%, from 30.1% in FY22.

Brand Addition’s trading record clearly shows the impact in FY20 of the pandemic lockdowns and working from home, as well as the suspension of large events such as trade shows. There was a good bounce back in H122, with a slower H222. Revenue in FY23 was 9% down on the prior year, having been ahead by 6% at the half year stage. It was this second half slowdown that was at the centre of the trading update and consequent downgrade in November 2023.

Tech and consumer clients in particular did not place orders as expected in Q3 and Q4, although clients in the engineering and transport sectors did. Weakness in spending by tech clients has been widely cited across the sector. Meta, Alphabet and Microsoft have all allocated less towards sales and marketing over recent quarters (Meta 9.1% of revenue for FY23 versus 13.1% in FY22; Alphabet 9.1% from 9.4%; Microsoft from 11.1% down to 10.3%) and this pattern is likely to have been replicated elsewhere. Recent trading updates from various larger marketing services organisations are indicating some improvements in tech company spending, but confidence remains fragile. Overall revenues from tech sector clients were down 22% in FY23 from FY22. The weakness from consumer sector clients was also reflected in sharply lower revenues, down 25% on the prior year, which management attributes to caution on the macroeconomic backdrop, with persistently higher interest rates. Engineering and transport clients, though, increased their spend.

Client retention remains strong. Client relationships tend to be longstanding, with the top 20 clients in FY22 contributing around 70% of Brand Addition revenues in FY23. In terms of client concentration, the top 10 clients accounted for 59% of FY23 revenues, with the next 10 adding another 25%. With an overarching strategy of win, grow, retain, repeat, Brand Addition ought to be able to show a steady accretion in its revenue line. However, the trading pattern in the last year shows that this cannot be taken for granted and our modelling is for progress of 3% in FY24 and FY25.

Brand Addition is increasingly meeting more sophisticated and complex requirements from its clients, particularly those with large, global brands to support. In many instances, it provides multi-country service delivery, global distribution management and sustainable product initiatives. This is reflected in the increase in FY23 gross margin to 34.1% (FY22: 30.7%). Management is now guiding to gross margins averaging around 33% over the long term, up from 30%.

The adjusted EBITDA margin dipped to 7.2% in FY20, from 10.9% in FY19, reflecting the difficult trading backdrop, and recovered to 9.7% in FY21 and to 9.8% in FY22, before dipping to 8.9% in FY23 on the reduced revenue. We have been cautious in our modelling assumptions, and do not assume expansion in the short term, but a faster recovery in the top line would shift this approach.

We adopt a mechanistic approach, combining the two parts and subtracting group costs to reach our estimates for The Pebble Group. On a group-wide basis, staff costs are the largest element of operating expenses, running at 19% of group revenue in FY23, up from 17% (which was the average level across FY19–23).

With Facilisgroup growing at a faster pace than Brand Addition and benefiting from structurally higher adjusted EBITDA margins, the group adjusted EBITDA margin should increase and we see this more noticeably in our modelling from FY25 on.

With larger-scale development projects, such as the building out of the product suite at Facilisgroup, the extent of the investment can get a little lost when it falls across several years of accounts. We therefore find it useful to look at the cumulative cash flow patterns. We have omitted the listing year as the raising of the finance and subsequent repayment of debt masks the underlying picture. This presentation clearly highlights that the investment programme has been the most important feature of the group’s development since listing. With the heavy lifting now done, the group’s capital allocation is likely to shift back towards shareholder returns through dividends and/or share buybacks.

It is worth noting that the working capital requirement shifts markedly across the course of the year, reflecting the requirements of Brand Addition, as shown in Exhibit 16 above (Facilisgroup as a SaaS business has an inherently smoother pattern). We would therefore expect to see working capital absorption in H1 and release in H2.

In FY23 specifically, Facilisgroup invested around £2.5m in Syncore (described above), which represented 15% of segmental revenue, while Brand Addition benefited from a similar level of investment. Facilisgroup is likely to need continuing investment to enable it to take full advantage of revenue growth opportunities. Guidance for FY24 is for capex of £7.8m (FY23: £8.5m, FY22: £8.4m), suggesting that the peak for the development costs of the Facilisgroup suite of products and services has now likely been passed.

The dividend in respect of the year to December 2023 was doubled to 1.2p, so the payment included in the chart above relates to the FY22 dividend. At IPO, the guidance was for distribution of c 30% of profit after tax in the form of dividends and the figure for FY23 was 34%.

With the FY23 results, management outlined the intention to buyback shares in the open market up to £5.0m in an additional approach to improving shareholder returns.

Pebble closed FY23 with cash of £15.9m on the balance sheet and lease debt only (£6.1m short-term and a further £1.5m non-current). Within the non-current assets, the bulk consists of goodwill and intangible assets (£44.0m of the £69.9m total). The carrying value of the software and development costs is £10.7m.

In terms of the working capital, much is influenced by Brand Addition (again, as illustrated in Exhibit 16, above). This inventory is not held on a speculative basis, but is effectively underwritten within the client contracts, having been designed in house to meet client briefs. The inventory trend should in general track divisional revenues, as should the trade receivables considering the blue-chip nature of the client roster. Facilisgroup has minimal working capital needs, being a SaaS business.

Management’s working assumption is that the group should maintain a debt-free balance sheet, with sufficient cash resource to meet reasonable needs.