The Consolidators

12 mins. to read
The Consolidators

As seen in this month’s issue of Master Investor Magazine.

In the first of a new series on the small cap markets Richard Gill, CFA analyses three recent additions to AIM, all of which are looking to grow in fragmented retail markets.


Joining AIM in June and raising £1.5 million, Fishing Republic is one of the largest retailers of fishing tackle in the UK, operating from seven stores in the north of England and online. The company’s physical stores are mainly in out of town industrial sites and as well as selling via its own websites the company also uses third party sites such as Amazon and eBay. All types of anglers are catered for – coarse, carp, game and sea fishing – with the firm selling a range of third party fishing tackle brands along with a range of higher margin own brand products.

Driving Fishing Republic is founder and CEO Steven Gross, who started the business in 1985. Gross is a keen fisherman, captained England’s under-21 fly fishing team and is a true entrepreneur, having set up his first fishing accessories business aged just 13.

The key to the investment case here comes from the fact that the fishing tackle market is highly fragmented and that Fishing Republic is looking to act as the first market consolidator.

According to the Tackle Trade Survey 2011, around 2,500 specialist fishing tackle retailers operate in the UK, with the retail market value standing at £541 million for the year. With sales hovering at around the £3.4 million mark for the past three financial years, Fishing Republic still only has a small share of this market – less than 1% in fact. What stands out about the company is its clear market consolidation strategy and that it now has the advantage of a stock market listing (and paper currency) in order to execute it. Of the net £1.05 million IPO proceeds around £0.25 million has been set aside as an acquisition fund, which should be enough to net the company a couple of small deals.

I also like the firm’s mixed physical and online growth strategy. Physical stores provide a “destination” for anglers where they can physically examine equipment before buying it. In this vein, £0.35 million of the IPO proceeds are being spent on opening a new store in Birmingham. Online sales amount to just under half of overall revenues and at present come mainly from third party sites. However, investment in the firm’s own sites saw sales in this area up by 45% in the last financial year and up by 30% in the three months to March, a trend which should improve margins. Of the remaining IPO proceeds another £0.175 million is there for online marketing and brand development, with £0.2 million for working capital.

Life as a public company seems to be going well so far. A brief update in mid-July confirmed that trading in the six months to June was “good”, with sales showing a small increase but with margins “improved considerably”. All market areas were said to have performed well, with online sales significantly ahead following the recent investment. Unfortunately the update was lacking in any numbers. Into the second half and trading is said to have started well, with small acquisitions being looked at and progress being made on opening the Birmingham store.


The smallest of the three stocks covered in this review, Fishing Republic is currently valued by the market at just £4.57 million. At the current 19.25p the shares are up by a healthy 28% on the IPO placing price of 15p. The accounts in the IPO admission document look sound, with the firm being profitable and cash generative over the past three years, with there being no significant borrowings.

The historic price earnings multiple of 19.3 times looks rather high at this juncture but the opportunity here is all about the future. Fishing Republic has ambitions to grow the value of the company tenfold and I think this looks entirely achievable if it can gain only a few percentage points of market share. With smaller retailers likely to be bought out much more cheaply than 19 times earnings the effect of any acquisitions should be highly earnings enhancing. Star small cap fund manager Gervais Williams seems to have recognised the opportunity, having taken a 14% stake in the business via his Miton Group.

On the downside, being such a small stock, with Stephen Gross and related parties having a 46.6% stake, there are obvious liquidity issues with Fishing Republic. Investors may also be concerned that Gross himself (rather than the company) owns the freeholds, or superior leaseholds, of the company’s seven retail stores. These stores have previously been let to the firm at no cost but by 2017 the total rent will rise to £100,000 per annum. In contrast, the directors are very modestly remunerated compared to other public company directors, with Gross only being paid a salary of £50,000 per annum as CEO.

Overall, this is not a stock for widows and orphans. However, a well executed strategy could see potential multi-bagging returns in the long term.


Back in the late 1990s, when I was buying my first musical instruments, I would not have dreamed of buying a guitar online. It is a rite of passage for every young guitarist to go down to their local music shop and annoy the owners by playing a terrible version of Stairway to Heaven. Going into the shops is also important for musicians to make informed buying decisions about their instruments. While physical stores are still crucial in this respect, the internet is quickly making inroads into the sector.

As another often covered musician sang, “The times they are a changin’”. This is where my next selection, Gear4music, comes in.

The Business

Gear4music has a similar background to that of Fishing Republic, it being founded by its current CEO, who retains a large stake in the business. A keen pianist, Andrew Wass began the company in 1995 and retains a 41.1% stake.

Operating from a newly refurbished 135,000 square foot warehouse and attached showroom in York, and via its own bespoke websites, Gear4music offers musicians a range of over 27,000 products from over 550 brands. Products range from accessories such as 25p guitar plectrums up to instruments such as guitars, pianos and drum kits which can cost several thousand pounds. While the majority of sales are of third party products, including the likes of Yamaha, Gibson and Roland, the company has also developed a range of over 1,400 own brand products. The firm currently operates 19 bespoke websites in a range of languages and currencies and has over 590,000 registered customers.

Revenue growth has been very strong in recent years. Following a £3.4 million capital injection from Key Capital Partners in 2012 turnover almost doubled, from £12.3 million to £24.2 million, over the two financial years to February 2015. This was driven by a 68% rise in UK sales and a more than fivefold increase in sales from Europe. Sales of own brand products grew by 27% on a like-for-like basis in 2015, providing enhanced margins for the business.

Market opportunity

The company’s strategy is focussed on taking advantage of what is a fragmented market in the UK and the continuing shift from physical to online sales. Like the fishing tackle market, the UK retail market for musical instruments is dominated by independent retailers and there is no large market leader. According to the firm, the top six companies account for only 16% of a UK market which was estimated to be worth £750 million in 2014. The opportunity for online growth is demonstrated by the estimate that only around 20% of sales are currently made online, with the shift from the high street continuing to accelerate.

Crucially, the company has significant capacity to meet further growth within its existing facilities. The York warehouse is able to dispatch an estimated 10,000 orders per day. This is well ahead of the firm’s peak dispatch day in December last year when 4,103 orders were shipped. Revenues of up to £50 million are thought to be achievable with the current facilities, which implies that annual group turnover could more than double using the York facility alone.

Another key part of the company’s strategy is focussed on further growth in European markets – the German and French markets are estimated to be worth over £2 billion in sales alone. Existing operations will be invested in and additional international websites are planned to be launched in the medium term. Back home, a flagship showroom in London is expected to be opened in the next 12 months, which should provide significant growth opportunities given that footfall will be much higher than in York. This also helps to provide an advantage over third party sites such as Amazon and eBay, as some suppliers can require that their products are displayed in face-to-face retail facilities.

Of the net £9 million IPO proceeds £4.3 million has been used to pay down loan notes, leaving the firm with borrowings of around £1.5 million. That still leaves a large chunk of cash which the company will use to further invest in its website platform and marketing, to build up inventories and open the London showroom.


Trading in Gear4music shares has been somewhat subdued since the firm listed on 3rd June. At the current 140.5p they are slightly ahead of the 139p IPO placing price, to capitalise the firm at £28.3 million. We have already seen that the company shares some similarities with Fishing Republic and again, this is not a stock that you would want to put anything more than a small part of your wealth into.

While the recent rise in sales has seen a move into profitability at the operating level, the company remains loss making overall, posting a net loss of £0.69 million for 2015. However, net operating cashflow was £1.55 million after a £2.2 million increase in trade payables. Strong growth in revenues has also continued into the new financial year, with like-for-like growth of 43% seen in the first two months and current trading being ahead of expectations.

With a well recognised brand, strong revenue growth being seen, significant spare operational capacity and cash from the IPO to fund the business plan I believe the shares are worthy of a speculative buy.


The largest stock covered in this review and the largest new listing on AIM this year is Applegreen, a Republic of Ireland based petrol forecourt retailer. By volume the firm has a 12% share of the motor fuel market in Ireland and at the end of 2014 had 96 sites in the country. In the UK Applegreen had another 54 sites, with two located in Long Island in the US. Site numbers have seen rapid growth since the company’s foundation in 1992 and as at 15th June this year the total number of sites had risen to 174. These are divided into so called Service Area Sites – large sites with a significant retail offering located near to motorways – and the smaller Petrol Filling Stations (PFS).

The company’s main source of revenues come from the sale of fuel but Applegreen also derives income from food via its own brands aCafé and Bakewell and concessions of international food brands such as Subway, Costa Coffee and Burger King. Other income comes from selling items such as tobacco, newspapers and the like. By revenues Applegreen is one of the largest on the whole of AIM, making €937.3 million in the year to December 2014, up by 18% compared to 2013 after increasing its total number of sites from 119 to 152. In fact, revenues have grown at a compound annual growth rate of 24% over the past four financial years.

Selling fuel is a low margin business, averaging just 6% in 2014. However, food is a lot more lucrative, with margins of 57%. This is demonstrated by the fact that fuel revenues in the Ireland business were ten times that of food during 2014, while gross margins from both were almost identical. At the bottom line Applegreen made a net profit of €12.3 million in 2014, although net cash from operations was better at €26.2 million.


Applegreen has a simple strategy which is focussed on acquiring and developing new sites, along with upgrading and rebranding existing sites. At IPO the company raised €70 million (£51.1 million) for itself which will be used to accelerate the expansion of the estate in Ireland and the UK from the current c.20 sites a year. In its admission document the firm said that it had a “strong pipeline” of such new sites. The money will also be used to upgrade and refurbish up to 70 existing sites in order to generate long-term incremental income – the company estimates that a rebranding at a typical PFS site in Ireland costing €270,000 could add €100,000 to annual EBITDA. In the US, the firm is looking to have 10 sites operational in the north east of the country by the end of 2016. Opportunistic acquisitions will also be considered.

The strategy is focussed on taking advantage of structural changes in the retail fuel market, which has seen oil majors exit from front line fuel retailing to focus on exploration and production, thus providing opportunities for independent retailers. The strategy is also driven by the solid growth in GDP seen in the UK and Ireland in recent times and the growth in disposable income that comes with it. Notably, figures have just been released which show that Irish GDP grew by 1.4% quarter-on-quarter in the three months to March, and by 6.5% compared to a year ago. The economy grew by 5.2% in 2014, making it the best performing in the European Union. Also in Ireland, a recent policy document from the National Roads Authority (NRA) highlighted a total requirement for 23 services areas in the Republic of Ireland to meet the needs of the motorist, compared to the current 12. With the NRA open to working with private companies to meet some of the requirements, Applegreen has further growth opportunities.


From the IPO placing price of 277p Applegreen shares have since risen to 315p, to capitalise the firm at £248 million. The historic earnings multiple of 28.8 times looks high, with the enterprise value/EBITDA multiple also high at 17.6 times. The company’s house broker has a €4.96 (349p) target for the shares which suggests 11% upside from here, although it does see upside potential to this target over time. Also, subject to the usual business requirements, the company intends to adopt a progressive dividend policy, with the first payment expected to be paid for the 2016 financial year.

With 59% of revenues coming from Ireland in the last financial year investors are of course exposed to exchange rate movements. Investors should also be aware that Applegreen’s growth has been driven by borrowings, with net debt as at 30th April being €51 million (£35.7 million). But given that the debt has helped to drive growth this is not necessarily a bad thing. Net finance costs were comfortably covered (almost 10 times by EBITDA) in the last financial year and the proceeds from the IPO have strengthened the balance sheet.

While Applegreen’s growth strategy is capital intensive, it has demonstrated good rates of return on capital. For example, while targeting a return on capital employed (ROCE) of around 20% it achieved figures of 36.6% and 35.2% in the last two financial years.

On balance, Applegreen is a solid growth business but with the valuation looking a little full I would prefer to keep this stock on the watch list for now.

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