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Investors’ Chronicle: YouGov, Sanderson Design, Superdry


BUY: YouGov (YOU)

Momentum is building at the research company, but a boardroom shake-up could unnerve investors, writes Jemma Slingo.

Shares in data analytics group YouGov slipped by 5 per cent in the wake of its annual results. The wobble is unlikely to have been caused by its financial performance — revenue is up by almost a third, margins are widening and demand is still strong. Instead, a boardroom shake-up seems to have rattled investors.

Stephan Shakespeare — who co-founded YouGov with Conservative minister Nadhim Zahawi in 2000 — has revealed that he will step down as chief executive next August and take up the role of chair, replacing Roger Parry. The board aims to select a new chief executive by spring 2023 to allow sufficient time for a handover period.

Analysts at Peel Hunt expect the “strategic direction” of the company to be maintained, regardless of changes at the top. This is reassuring, as YouGov’s current strategy seems to be going swimmingly.

Sales were strong in the year to July 31, with all three divisions reporting double-digit growth. The group’s custom research arm — which conducts tailored research projects and tracking studies — is expanding the fastest, with sales up 46 per cent year on year. Encouragingly, its operating margin is also widening, meaning that divisional adjusted operating profit shot up by 54 per cent to £21mn. 

Data services had a trickier year after a “stellar” 2021. A muted first half, combined with investment in panel and technology costs, led to a 13 per cent decline in adjusted operating profits. Across the group as whole, however, margins have increased from 15.1 per cent to 16.4 per cent. This follows several years of improved profitability, with margins widening from 11 per cent in 2018 to their current level.

YouGov continues to make rapid progress in the Americas, increasing revenue and operating profit by 33 per cent and 40 per cent, respectively. Increased brand awareness is helping matters, allowing YouGov to take on rivals such as IHS Markit and Gartner.

YouGov said its new financial year has “started off well across all divisions”, adding that no material changes in client behaviour have been experienced to date. While a recession could affect demand, management stressed that strong subscription renewal rates and new longer-term deals have provided better visibility. Over a third of its revenue target for 2023 has already been secured.

YouGov isn’t cheap, but a tough year for equities means it’s better value than it has been for some time, with a forward price-to-earnings ratio of roughly 22.

HOLD: Sanderson Design (SDG)

Management is wary of sounding too bullish in a challenging cost environment, writes Christopher Akers.

Sanderson Design posted a mixed set of results despite an upturn in pre-tax profits. The Aim-traded purveyor of luxury interior furnishings — wallpapers, fabrics, and paints — relied on its small licensing division to drive forwards profitability as brand product sales faltered across markets.

Brand product income (items sales from the brand portfolio such as Clarke & Clarke and Morris & Co) is key for Sanderson, given it is by far its biggest revenue contributor. But brand revenue was down by 3 per cent to £42mn due to the halting of trade in Russia and by a top-line comparative which was helped by Brexit customs issues moving European dispatches into that period. At a geographic level, the North American market was the winner with brand sales growing by over 12 per cent to £10mn, as northern Europe performance collapsed by a fifth and the UK (the company’s biggest market) suffered a 1 per cent fall. Manufacturing sales, meanwhile, were up by 3 per cent to £22mn.

Sanderson’s licensing revenue comes from its allowing the use of its designs on products such as bed and bath collections, rugs, blinds, and tableware. While a tiny revenue contributor in comparison to the other income streams, licensing is high margin (it enjoys a 100 per cent gross margin), and it was this which drove the overall uplift in profitability in the half. Licensing revenue boomed by 90 per cent to £4mn, with new and extended licensing agreements signed, including with Next.

Analysts reacted cautiously. Investec trimmed its 2024 financial year adjusted pre-tax profit forecast by 9 per cent and cut its target price from 230p to 210p, although it said that “Sanderson is relatively well placed to weather inflationary pressures and management’s strategy is clearly paying off”. Progressive Equity Research now expects flat profits for the next two financial years but said that its outlook on Sanderson is “testament to the ongoing strategy and strengths of the group, supported by its strong balance sheet”.

Sanderson expects that the board’s trading forecasts for the full year will be met, but also said that “we need to look ahead with caution”. This looks prudent given cost headwinds, especially as the annual electricity bill could soar by £2mn without the government cap, according to management. But the valuation looks undemanding, with the shares trading at seven times Investec’s earnings forecasts for the three financial years from 2023.

SELL: Superdry (SDRY)

The retailer returned to annual profit, with stores revenue up by 63 per cent to £228mn as the estate reopened, writes Christopher Akers.

It might seem oxymoronic to market a company as both “premium” and “affordable” but that is the message Superdry chief executive Julian Dunkerton has been selling as he drives forward a full-price strategy which eschews discounts at the clothing, accessories, and footwear retailer. This strategy paid (metaphorical) dividends in the year, as evidenced by a 15 per cent jump in the shares on the morning of these results; good news for investors after several years of poor performance since an early-2018 peak.

The pricing stance helped push the gross margin up by 350 basis points to over 56 per cent, with the full-price retail sales mix rising by 26 percentage points. Retail and wholesale cash profit margins also made notable progress, up by 10 per cent and 22 per cent, respectively, as Superdry returned to profit against a comparative period of store closures and restrictions. Price rises for the autumn and winter collections this year and the spring and summer collections in 2023, along with the introduction of delivery charges for online orders, should help the top line and profitability further.

Analysts at Peel Hunt said on the back of these results that “Superdry’s recovery is more tangible and profitable, on a valuation that appears to have given up”. That’s a fair statement, given the shares trade at just six times the house broker’s forward earnings forecast. A cheap valuation and a return to the black is supported by solid current trading, with total revenue up by 7 per cent for the 22 weeks to 1 October despite a challenging retail environment, although the gross margin fell back by 230 basis points in the same period.

Hermione Taylor: Keeping monetary policy and government finances apart

When economics articles start making the headlines, it’s usually bad news. When these articles contain obscure technical terms, it’s often an even more ominous sign. The latest of these is “fiscal dominance”. 

Since central bank independence became commonplace, advanced economies have had a clear division of labour: governments control fiscal policy (tax, spending, debt and deficits), while central banks control monetary policy (interest rates and quantitative easing/tightening) – usually with the goal of meeting an inflation target. 

Many advanced economies have spent years under a system of “monetary dominance”, with central banks free to change policy to control inflation as they see fit. Fiscal dominance, on the other hand, arises when monetary policy becomes constrained because of concerns about the impact it could have on government finances. 

The central bank is no longer able to take the actions required to meet its inflation target, meaning that monetary policy is effectively dictated by the government. At the most extreme end, we see central banks financing fiscal deficits. Even a milder case might see the central bank acting against its own interests: after all, high inflation erodes the real value of government debt, and raising interest rates to tackle soaring price levels would only raise the cost of government borrowing. 

Concerns about fiscal dominance in advanced economies bubble up periodically, usually in times of high government spending. Following high levels of pandemic stimulus in 2020, the ECB’s executive board member Isabel Schnabel stressed that “the euro has been built on the principle of monetary dominance”, and dismissed concerns that high government debt could induce the central bank to deviate from its monetary policy objectives.

For the UK, the spectre of fiscal dominance was raised last week when the Bank of England (BoE) suspended active quantitative tightening and was forced to intervene to stabilise the gilt market. ING economists noted that although “die-hard sterling bears” saw this as evidence of the BoE providing room for the government to continue with its aggressive fiscal programme, the case isn’t convincing. The intervention was firmly for the purposes of financial stability, and ING economists concluded that fears of fiscal dominance look like “hyperbole”. 

Nevertheless, accusations of fiscal dominance do little to enhance the UK’s economic credibility (as my colleague Dan Jones writes here), and the government was quick to release a statement confirming that “the chancellor is committed to the Bank of England’s independence”. 

But this hasn’t always been the case: the two pillars of economic policy were once closely (and deliberately) linked. In a wide-ranging history of central banks, NBER economists Michael Bordo and Pierre Siklos argue that many of the first central banks were set up specifically to manage public debt. The earliest (the Swedish Riksbank and the Bank of England), were established in the late 1600s with the additional mandate of financing wars. The Federal Reserve was only founded in 1913, and started targeting inflation in 2012 — 20 years after the BoE. 

The move towards policy separation has, generally, been a welcome one. Historically, many episodes of hyperinflation have been associated with central banks financing government debt: think Weimar Germany in the 1920s and Latin America during the debt crisis of the 1980s. More recently, the IMF identifies governments borrowing from their central banks to finance deficits as a “pressing problem” in Sub-Saharan Africa, with hyperinflationary episodes in Zimbabwe acting as a stark warning. 

There are consequences for milder cases of fiscal dominance, too. Schnabel argues that past experience “teaches us that financial repression typically crowds out private investment and thereby leads to lower growth and employment”. Schnabel also stresses that “history suggests that society is better off under a regime of monetary dominance”, adding that the safeguards put in place to preserve central bank independence remain “important pillars of stability and prosperity”. 

But government debt to GDP ratios and inflation are both increasing – and so are interest rates. The independence of monetary and fiscal policy in many advanced economies is well established, yet some link between interest rates and public finances endures. 

Hermione Taylor is an economics writer for Investors’ Chronicle



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