Interactive Investor

Stockwatch: why this tiddler could be a great catch

26th October 2021 09:16

Edmond Jackson from interactive investor

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This small-cap wants a slice of this £3 billion market, just in the UK. It could be very lucrative, but what does our companies analyst think?

In August 2020, I drew attention to Angling Direct (LSE:ANG) shares as a “buy” at 60p, along a rationale that lockdowns could prompt a sustainable rise in angling activity, hence sales – at a time when this company’s margins could also improve, thanks to a new CEO. 

His background as chief operating officer - both at Dunelm and Holland and Barratt, plus various executive roles at Halfords – is opportune for leveraging growth both in the UK and continental Europe.  

I had previously suggested avoiding the stock, which listed in August 2017 at 64p but, as the table shows, has taken time even to show an operating margin near 5%.  

Price rallied to a mid-80p range by last May, although in early September it was back down to 60p – significantly reflecting wider weakness in UK small-caps rather than issues with the company. 

After first-half results to 31 July raised operating profit guidance to over £5 million, it is interesting to re-examine Angling Direct. The news triggered a jump from 64p to 76p which has eased to 73p. That is, on the face of it, fair enough, given net profit near £4 million implies earnings per share (EPS) of around 4p. A forward price/earnings (PE) of 18x would seem high enough until the business grows more sustainably. The stock also trades at nearly twice tangible book value, despite no dividends.   

An implied £3 billion consumer market in the UK alone 

Angling is hardly considered a mass market, yet the National Rivers Authority estimates there are 2.2 million coarse anglers and 0.8 million game anglers, each spending about £1,000 a year. 

Together with a classic fragmented industry of small independent shops, there has appeared scope for acquisitions to gain economies of scale – buying tackle and bait – also to combine this logistically with online sales.  

Angling Direct thus proclaims itself as the UK’s leading tackle retailer across shops and online – with emerging capability also in Germany, France, the Netherlands, Austria and Belgium.  

So yes, there is a case for moderate value in the stock, especially now a new CEO has had 18 months to settle in. The question being, how much is fair? 

A two-year transformation plan is being initiated for the UK stores, and two more opening by the end of this year will take the total to 41. That seems modest in a national context and the results cite “a healthy property pipeline for underserved catchments”, hence potential for a few years of organic growth from shops. 

This programme is said to be starting to deliver sustainable levels of profit, with transaction values up nearly 4% and like-for-like sales over 32%. Total store sales have risen just over 40% to £19.9 million. 

Overall group revenue rose 19.5% to £38.4 million, involving a contrast: the first quarter up 54% but the second by just 3.5%, given a tough comparator of stores re-opening in June 2020 – hence exceptional demand.  

The tempering factor was online sales rising only just over 3% to £18.5 million, somewhat affected by “year-on-year lockdown-driven change in channel mix” – we might view this as exceptional. 

A curiosity is citing 16% UK online sales growth being checked by a 34% drop in Europe because Brexit issues disrupted deliveries and restricted export of bait. Yet European online sales are anyway modest in a group context, down from 7.6% to 3.3% of the total. 

Anyway, partnering with a leading German bait manufacturer and opening a new European fulfilment centre in the Netherlands are hoped to turn continental sales around. Lead times to European customers are said to be improving as new customs and border practices stabilise. 

Likely sales for the fourth quarter to January 2022 are said to be “uncertain” which, to an extent, can be expected given propensity for especially wet periods nowadays deterring anglers during winter. It may also reflect quite where activity settles after angling enjoyed a boost from furlough schemes and inability to socialise indoors. 

More positively, the launch of an industry-unique app before Christmas is hoped to offer customers more scope when out-and-about, and also improve online marketing. 

It would still appear that the angling market offers a substantive opportunity for a capable CEO to grow a smaller plc from Angling Direct’s present market value of £56 million – representing 0.8x sales. 

Angling Direct - financial summary
Year ended 31 Jan

  2015 2016 2017 2018 2019 2020 2021
Turnover (£ million) 11.1 16.4 21.0 30.2 42.0 53.2 67.6
Operating margin (%) 4.9 2.9 3.5 0.7 -0.4 -2.2 4.6
Operating profit (£m) 0.6 0.5 0.7 0.2 -0.2 -1.2 3.1
Net profit (£m) 0.4 0.4 0.6 0.0 -0.4 -1.3 2.4
Reported earnings/share (p) 1.0 0.9 1.3 0.1 -0.8 -2.0 3.3
Normalised earnings/share (p) 1.0 0.9 1.3 1.8 -0.8 -2.0 1.4
Operating cashflow/share (p) -0.2 0.4 -0.4 -1.5 -6.0 -1.5 9.4
Capex/share (p) 0.4 0.9 0.5 4.5 8.6 4.6 2.4
Free cashflow/share (p) -0.6 -0.5 -0.9 -6.0 -14.6 -6.1 7.0
Return on total capital (%)     19.0 1.7 -0.5 -3.3 7.1
Return on equity (%)     76.5 0.6 -2.1 -5.0 8.2
Cash (£m) 0.1 0.0 0.3 0.7 13.5 6.0 15
Working capital (£m) 1.0 1.1 0.9 1.1 18.1 12.8 20.2
Net debt (£m) 0.6 1.0 1.5 4.5 -7.5 4.5 -3.9
Net assets per share (p) 0.3 1.1 2.3 18.5 41.5 39.4 42.9

Source: Historic Company REFS and company accounts

Margin development is central to the investment case 

Economies from consolidating shops, differentiation for customer service and overall product offering are key.  

Indeed, the first-half gross margin has improved from 33.5% to 37.4% like-for-like, and at the operating level from 3.6% to 9.1% which is more satisfactory. 

Mind, the company says, “we are not immune to increased raw material and freight costs, however, these will be offset by our margin growth and we are well-placed to continue mitigating any impact.” 

Quite like the Brexit disruption, you have to hope this will all eventually settle down – proving a transition phase rather than anything permanent by way of cost increases.   

So, it is a bit speculative, but at least the CEO shows resolve on overall cost-cutting to deal with specific rises. If the operating margin can consolidate around 10%, that is a decent business.  

Elsewhere in online retail, Gear4music Holdings (LSE:G4M) has only recently raised its margin from around break-even or low/mid-single digit percentages, to near 10%. Selling musical instruments has achieved a £185 million company on 1.2x sales and a 25x forward PE multiple. Possibly the regular need for budget-priced instruments for schoolchildren, indeed anyone cash-strapped to play, warrants a relative premium rating for this stock. Yet I can recall since a boy, angling has been a hotbed of enthusiasts over decades. It should therefore be possible to hone a worthwhile plc focused on this sport. 

Moreover, compared say with luxury furnishings, anglers’ circa £1,000 a year is quite modest discretionary spending, and perhaps able to remain firm despite inflation eating into living costs. 

Strong balance sheet, cash flow affected by working capital changes     

The financial structure is low risk: there is no debt, just £10.7 million lease liabilities versus £19.6 million cash which augurs well for rolling out the shops and online development. Net lease costs around £200k compare with £3.9 million operating profit.   

Consequently, the ratio of current assets to current liabilities is nearly 3.0x, where a 41% rise in inventories (in anticipation of resumed sales after lockdown) was a factor in why net cash from operations fell 49% to £5.8 million. A 17% reduction in trade payables – good housekeeping – to £10.4 million also explains how working capital movements affected cash flow. 

At this stage of development, it would be premature to expect dividends, and after £5.5 million was raised by a June 2020 share issue (albeit significantly to buttress the group against Covid and ensure prompt payment to suppliers). In the longer run, the stock ought to mature as a dividend-payer – retail being cash generative – although it's unclear quite what extent of yield would emerge on a growth rating. 

Angling Direct therefore does not come across as a conviction, exciting growth stock, but merits a tuck-away for its CEO to re-rate value over time, given a circa £3 billion market in the UK alone. Buy. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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