Findel – Mike Ashley’s highly opportunistic offer undervalues the shares

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Findel – Mike Ashley’s highly opportunistic offer undervalues the shares

In the last six years or so Findel has undergone quite a transformation of its trading activities. It is looking good and beginning to show some strength and growth potential, writes Mark Watson-Mitchell. 

From being a bit of a ragbag of businesses, the subsequent disposal of three of its operations has left Findel (LON:FDL) to concentrate on its two main digital-first value retailer divisions: Studio Retail, which offers a broad range of products to its customers, from clothing to homewares to its traditional Christmas ranges, all supported by flexible credit; and Findel Education, which is a market-leading supplier of educational resources for schools and children’s nurseries.

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Studio is one of the largest online value retailers in the UK. Whilst historically catalogue based, over 75% of its customers now shop online for its broad range of fashion, home and leisure items, toys and gifts.

This division provides a personal shopping service to around 1.9m customers each year, through a combination of direct marketing and online via its and websites. It has a multi-channel operation – catalogue, internet and face-to-face.

Supported by its overseas sourcing operations, the range of products is diverse covering leisurewear, electrical, household, textile, bedding, furniture, nursery products, gifts and greeting cards. Many of these can be personalised in the division’s in-house facilities, which are unmatched in UK retail.

The company gives its shoppers the ability to choose to pay for purchases within 28 days or take advantage of the company’s flexible credit offer. The majority of its customers open an account, which allows them to choose whether to pay for their purchases immediately or to spread the cost over a number of months. Interest is charged on outstanding balances each month.

All large products are handled at a 500,000 sq ft distribution centre in Manchester, whilst an automated collation warehouse at Accrington is capable of handling over half a million items per day.

One of this division’s main strengths is its ‘state of the art’ distribution facilities giving it a unique ability to handle low ticket items profitably. It also claims that it has the most sophisticated product personalisation facility in the UK mail order sector.

Findel Education is one of the UK’s leading educational resources suppliers. Through its established brands it has been providing resources to nurseries, schools and several other types of educational establishment since 1817.

It considers that it is the one-stop-shop for educational supplies. Claiming that it can provide all of the products schools and nurseries need, delivered when they want them, and all at highly competitive prices.

Its extensive choice of over 25,000 resources caters for early years through to higher education and beyond. That unique offering means that its customers can find everything they need from one complete supplier – for the school, for the classroom and for the specialist.

The pruning of its divisions and businesses over the last decade has now given the group a fresh and strong focus upon which it will grow.

And what is left is a very far cry from the origins of the company. Fine Art Developments floated on the old Birmingham Stock Exchange way back in 1962, when itsactivities were the design and manufacture of greeting cards and gift wrap, together with a mail order service for national charities and fund raising.

I first met the late Frank Kerry, the company’s founder, way back in 1970 and liked him and his business, so much so that it was one of the first companies in which I took a meaningful stake and recommended its shares significantly.

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A demerger in 1997 split off its mail order and education sides away from its cards, giftwrap and stationery businesses. The latter was later taken over by Hallmark in 1998 and two years later Fine Art Developments changed its name to Findel.

Last week the group announced its results for the year to 29thMarch 2019, showing that pre-tax profit jumped 33% to £29.4m on revenue of £506.8m, up 5.7% from 2018.

The Studio division was the main driver, enjoying a particularly good Christmas trading period. That has brought about another planned name change to the Studio Retail Group, with the results reflecting the strength of the transformation into a digital-first, value-led retailer. The education side is now also making good progress with its own digital-first mentality in saving schools time and money.

This current year could see sales of £535m and pre-tax profits of some £31m, worth 28.5p per share in earnings.Next year, £560m of sales could generate a pre-tax profit £34m, worth 31p in earnings. For the 2022 trading year, estimates already suggest £590m of sales and pre-tax profits coming out at £38m. That would jack earnings up to around the 36p per share level.

Such sales and profits growth is obviously what tickled the interest of Sports Direct’s Mike Ashley. In 2015 he acquired an initial 19.9% stake in the company, before later taking it up to 29.9%. In March this year he took over another holder’s 6.7% stake and that required a mandatory bid to be made. His 161p per share in cash offer was very largely rejected, with his acceptances getting just under 1%. His holding is now 36.8%. What will happen in the future is anyone’s guess.

However, I like this Group’s shares, now 253p, and rate them as capable of good growth over the next few years in both price and profits. Taking an end 2020 view, they appear undervalued at any price less than 375p.

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