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Investors’ Chronicle: Moonpig, Wise, Mulberry

BUY: Moonpig (MOON)

Trading settled down after a pandemic boom, but growth was still solid against pre-Covid postings, writes Christopher Akers.

Moonpig’s shares are down by about a third since last year’s IPO, with investors spooked by the comedown after Covid-19 turbocharged the top line. The online greeting card and gift retailer’s revenue tumbled by a fifth in these results against lockdown-aided comparatives as trading normalised.

It would be easy to be taken in by a post-pandemic narrative of doom and gloom. But the other side of the equation looks rather good. Moonpig has outstripped the targets set at IPO, is aiming for annual revenue growth in the mid teens in the medium term, while taking on new customers at a faster rate than pre-pandemic, and has bumped up margin guidance. And looking ahead, the £124mn acquisition of gift experience platform Buyagift (expected to complete in July) should help take financial year 2023 revenue to about £350mn.

Gross margin fell by 120 basis points to 49.3 per cent in the year, driven by “the category mix impact of higher gifting sales” rather than suffering from cost inflation pressures. Higher shipping costs are being mitigated by passing on higher stamp prices. This is encouraging given the wider cost environment.

Begbies Traynor partner Julie Palmer said that “Moonpig has the attributes to succeed in a market where we’re ready to go online to take the effort out of gift giving” but that “perhaps the real test will be the squeeze on household finances”. The shares are trading on 18 times forward consensus earnings, and an underlying free cash flow yield of 6 per cent offers “good value”, say Numis analysts. We are sticking with our recommendation for now, with a lower share price offering an attractive entry point for investors.

BUY: Wise (WISE)

Increasing administrative expenses are eating into profit margins, but free cash flow still rose 9 per cent, writes Arthur Sants.

When Wise was founded in 2011, its aim was to make international money transfers as cheap as possible. Traditional banks charged fees as high as 3 per cent to move money across borders. The level of the charges were routinely disparaged and Wise knew it could be done a lot cheaper. It was an admirable mission and it has brought the payment business rapid customer growth.

In the year to March 31, Wise’s take rate on transactions was 0.63 per cent, down seven basis points from the year before. This low rate is attracting customers. In the last quarter of 2022 it had 4.6mn customers, 31 per cent more than a year earlier. And customers were transferring £4,700 on average, 7 per cent higher on a year-on-year basis.

More customers and more transactions pushed total revenue up 33 per cent to £560mn. Gross profit also increased 43 per cent. These numbers are impressive. However, to achieve this growth Wise has been spending a lot more on administrative and marketing expenses.

In total, administrative expenses increased 48 per cent to £321mn. Employee expenses were the main driver — wage inflation is a problem for many tech companies — rising 31 per cent to £184.8mn. Meanwhile, marketing expenses were up 30 per cent and outsourced costs rose 55 per cent. This meant the adjusted cash profit margin was 21.7 per cent, down from 26 per cent last year and below the 23 per cent consensus expectation.

Wise currently has 3.5 per cent of the cross-border market and wants to capture as much of the remaining opportunity before other competitors join the low fee party.

Wise is aiming for annual revenue growth above 20 per cent in the medium term and broker Numis believes this is possible. Inflation should help it achieve these aims as Wise takes a percentage fee on transfers. FactSet consensus expects earnings per share to more than triple to 10p in full-year 2024, which gives a 2024 price/earnings ratio of 33. The multiple has contracted significantly from earlier this year (in common with tech stocks generally) and despite the rising operating costs, this looks like a reasonable entry point. Growth comes at a cost and given £113mn in cash flows, investors should not be complaining too much.

HOLD: Mulberry (MUL)

Rising margins on luxury handbags multiplied luxury leather goods maker Mulberry’s profits, writes Madeleine Taylor.

Mulberry is feeling the benefit of higher full-price sales and a gain on the disposal of its Paris store lease, which led profits to quadruple to £21.3mn over the past year. Gross margins also jumped to 71.7 per cent in the year to April 2, up from 63.6 per cent in the previous year, cementing the British heritage brand’s progress from lossmaking to profitability over the past five years.

However, chief executive Thierry Andretta tempered the outlook with caution, saying he expected the business to grow “at a slower rate” from here on due to “severe disruption” caused by the geopolitical situation, inflationary pressures and Brexit-related challenges.

One of the factors leading to this is its expansion into the key luxury fashion markets of the Asia Pacific, one of the pillars of Mulberry’s recovery strategy since swinging to a £5mn loss in 2019. While four-fifths of sales are still in the UK, Asia Pacific revenues have been rising quickly, with retail sales in China rising by 59 per cent in the past year alone.

Since the start of the new financial year, Covid-related lockdowns have forced shutdowns at the majority of its stores in China and the Shanghai distribution centre. As a result, retail and digital sales dropped 1 per cent in the three months to June, although stronger wholesaling led to 5 per cent overall revenue growth.

Shares currently trade at around a 50 per cent discount to peers, said Shore Capital, adding that this does not reflect Mulberry’s direct-to-consumer strategy or emphasis on sustainability, both of which “could drive a premium rating”. More than half of Mulberry’s manufacturing is in the UK, giving it an advantage over sector peers that faced supply chain issues. However, the stock is rather illiquid, with the vast majority of shares owned by Singapore’s Ong family and Frasers Group, which could complicate progress on re-rating.

Hermione Taylor: Double trouble from inflation

CPI inflation in the UK has hit 9.1 per cent. This represents the highest level since 1982, overshooting the Bank of England’s 2 per cent inflation target by more than 7 per cent. And this means trouble for governor Andrew Bailey. If the Bank misses its target by more than one percentage point either way, he must write a letter to the chancellor explaining both the reasons for the divergence and the Bank’s strategy for bringing inflation back on target. In terms of UK monetary policy, 3 per cent inflation is undesirable. But how much worse is 3 per cent than 2 per cent? And how much worse is 9 per cent than 3 per cent?

Doubling times can provide an intuitive interpretation. At a stable 2 per cent rate of inflation, general prices double every 35 years. The picture is muddied by the fact that inflation is calculated using a basket of goods, meaning that the price of some items would increase by more than 2 per cent annually over the period, and some by less. But as a rule of thumb, a basket of goods will take a generation to double in price when inflation runs at 2 per cent.

At 3 per cent inflation, this doubling takes around 23.5 years: a significant hastening, but still a reassuringly long time period. At 5 per cent inflation, the doubling time shrinks to 14 years. And at a sustained rate of 9 per cent, prices double in just eight years.

This acceleration is uncomfortable enough. But the problem is intensified by the fear that inflation of 9 per cent is unlikely to hold steady. At high inflation rates, workers try to maintain living standards by asking for inflation-busting pay rises. Wage hikes increase business costs, which are then passed on to consumers in the form of higher prices. Wage demands then rise again as households try to keep pace with inflation, and the economy enters a dreaded wage-price spiral.

In extreme cases, this can even tip over into hyperinflation, where increases in the general price level happen at breakneck speed. Steve H Hanke from Johns Hopkins University has identified 57 historical cases of hyperinflation, defined by inflation rates greater than 50 per cent per month for over 30 days. Belarus, for example, had a ‘mild’ case of hyperinflation in 1994, with monthly inflation hitting 53.4 per cent. Prices doubled in just 49.3 days. In Zimbabwe in 2007, monthly inflation hit 4.19 × 1,016 per cent — a mind-bending number rendered easier to understand in the context of prices doubling every 15 hours.

That is not to say that the UK economy risks anything close to these levels: if anything, inflation looks more likely to come down over the next 12 months than go up. Paul Dales, chief UK economist at Capital Economics, argues that although inflation has not yet peaked, this month’s release showed no obvious signs of persistent inflationary pressures. According to the CBI’s monthly Industrial Trends Survey, firms’ expectations for higher prices decreased this month, with signs that weaker activity is beginning to slow the rate of price increases. The Bank of England, for its part, expects the rate of inflation to slow next year and return to close to 2 per cent in around two years’ time.

Doubling times can provide a useful rule of thumb for investments, too. First, they provide a reminder of the importance of keeping an eye on management fees. Take an investment returning a healthy 6 per cent. With an annual cost of 0.5 per cent, its nominal value will double in 13 years. With costs of 2.5 per cent, the doubling time stretches to more than two decades. Doubling times also illustrate the importance of keeping pace with inflation — currently easier said than done. Allow for an optimistic 2 per cent rate of inflation, and the latter investment would take almost 47 years to double in real terms: a troubling doubling time indeed.

Hermione Taylor is an economics writer for Investors’ Chronicle

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