Insider: time to buy Mothercare and rail stocks?

Directors in two struggling sectors are backing a revival with their own money. Here’s the rationale. 

A year after Mothercare (LSE:MTC) stores in the UK were plunged into administration, its management team have sent a message that they believe the turmoil is now firmly in the past.

Thursday's disclosure of share purchases by chairman Clive Whiley and chief financial officer Andrew Cook is the first by directors this year, and comes a week after full-year results highlighted the potential of Mothercare's new asset light franchise model.

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Without the loss-making UK stores, the baby products company has been rebuilding through its network of franchise partners in 40 countries, who operate 791 stores worldwide. Its Mothercare branded products are also soon to appear in Boots stores in the UK and Ireland.

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The closure of franchise stores due to Covid-19 lockdowns frustrated progress earlier in the year, but Whiley insists the company is still in better shape than when it entered the pandemic.

It has secured a new 20-year agreement with its biggest franchise partner, Alshaya Group, and there are signs that Mothercare is becoming more established as a global brand.

While this is clearly a work in progress, Whiley believes the group has the potential to deliver annual operating profits in the region of £15 million. His optimism has the support of analysts at Shore Capital, who have reiterated their “buy” recommendation and said the company is well placed to “survive and thrive”.

Shares, which plunged to as low as 4p in March, closed on Friday at more than 11p after rallying from the 8.3p seen prior to the full-year results. The £6.4 million adjusted loss highlighted the pain of last November's restructuring and the administration process for the cash-hungry UK business, whose £30 million of operating losses had threatened the wider global business.

The UK retail arm did not make an annual operating profit in over 10 years, despite the support of a £100 million fundraising in 2014 and various efforts to restructure the business. Rather than spending more time and money on trying to fix “the conundrum of UK retailing”, the company chose to focus on building the Mothercare brand around the world.

Whiley said in last month's results:

“We estimate that there are at least 30 million babies born every year in the world, into markets addressable by the Mothercare brand, yet only 700,000 in aggregate in the UK. Hence whilst the UK is important for our brand heritage, it is certainly not the singular growth engine of the group.”

He is currently overseeing discussions on a refinancing of the group's £13.7 million of debt, while also looking for a new chief executive to succeed Mark Newton-Jones who stepped down in January. Whiley, who was appointed chairman in 2018, has overseen the running of the business with day-to-day help from Cook and chief operating officer Kevin Rusling.

Whiley bought £22,500 worth of Mothercare shares at 10p on Monday, with Cook picking up Mothercare shares for the first time with the addition of £100,000 worth of stock at 11.5p.

Aside from a £3.2 million fundraising last November, when Whiley acquired £50,000 of placed shares at a price of 10p, this is the first time any Mothercare director has backed the company since Whiley and Newton-Jones did so in March 2019.

Shore Capital analyst Clive Black said the refinancing and CEO appointment were the final jigsaw pieces for the creation of a “solvent, capital light and cash generative business”.

He added:

“We continue to feel that this is a company that is going to survive and thrive and so this penny stock is one that we continue to believe for recovery, value and special situation fund managers.”

Rail stock revival

Go-Ahead (LSE:GOG) and FirstGroup (LSE:FGP) continue to be shunned by investors, although the highly uncertain trading environment hasn't stopped directors at both companies from buying shares.

Chief financial officer Elodie Brian purchased £20,000 of Go-Ahead stock at a price of 585p on Friday, having also bought £30,000 shares in April at a far higher price of 1,205p. Shares were trading at 2,214p in February before plunging as low as 473.5p a month later.

Results at the end of September failed to inspire a recovery, despite the company pointing out that 90% of revenues are secured through contractual arrangements, mainly relating to its London buses and UK rail franchises Southeastern and Govia Thameslink Railway.

The London buses division will continue to deliver a profit in the new financial year, having made a surplus of £48.5 million in the annual results, while the rail division is expected to break-even this year after the government moved operators on to transitional contracts.

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A person connected to FirstGroup chairman David Martin bought shares worth £19,100 on Wednesday, with the price of 382p a record low. The stock has continued to languish despite the company reporting that its school buses have seen a pick-up in demand since the start of the academic year on both sides of the Atlantic.

Group-wide operating profits and cash generation were also ahead of expectations between April and 31 August, underpinned by support from governments to ensure services run in accordance with Covid-19 social distancing rules.

CEO Matthew Gregory added that “clarity is improving over time” as the group comes to terms with pandemic disruption. It has also been encouraged by significant interest from potential buyers for FirstGroup’s North American businesses, including its First Student school buses.