Learnings Technologies Group, Asos, Saga

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BUY: Learning Technologies Group (LTG)

The company’s valuation has dropped significantly, yet strong cash generation feeds into the investment case, writes Arthur Sants.

The story for Learning Technologies Group hasn’t quite played out anticipated. As a corporate e-learning company, the thinking was it would be recession-resistant because its customers were required to use its product from a regulatory and compliance perspective. However, the company blames the macroeconomic situation for its recent slowdown.

In the 12 months to December, revenue fell 4 per cent while its adjusted operating profit fell 1 per cent. Learning Technologies blames the macro conditions for a drop in projects. However, it has credited the recurring nature of its software revenue, which makes up 26 per cent of the group, for revenue not falling even further.

The problems facing Learning Technologies can be traced to a massive acquisition in 2021. This required it to take out debt and now, with interest rates rising, the cost of that debt is higher. Net interest payments have risen from £4.3mn to £15.7mn, which will drag on profits. Meanwhile, GP Strategies revenue fell 2 per cent on a constant currency basis.

The positive news is that GP Strategies’ margins are improving as it gets integrated into the group. So, if its revenue problems really are just due to the macroeconomic cycle, as things improve so should its profitability.

Learning Technologies trades on a forward price/earnings ratio of 11 times, and its strong cash flow generation means its free cash flow yield is almost 10 per cent. In other words, it is cheaply rated on that basis. Management is forecasting that revenue will be in line with the prior year, but margins are showing positive signs. The business is still faced with a challenging trading backdrop, but, given the undemanding rating, we think that the investment case remains positive.

SELL: Asos (ASC)

The journey to a leaner and more agile business could be a long one, writes Jennifer Johnson.

Inventory problems are nothing new at fast fashion group Asos — but there are signs that it may (finally) be running down its sizeable stocks. At the end of the first half, the retailer had £593mn of unsold merchandise against a full-year objective of £600mn, meaning planned reductions are running ahead of schedule. 

It mostly achieved the cuts via heavy discounting, which resulted in its adjusted gross margin falling 260 basis points to 40.3 per cent. Approximately half of the total stock reduction achieved in the first half came from the clearance of items more than one year old. 

Management plans further clearance activity for the remainder of the financial year to “unlock the full benefit of the new commercial model from [full-year 2025]”. This model, dubbed “test & react”, involves bringing stock into the business on a two-to-three week lead time. It’s designed to reduce stock risk, because shorter lead times enable lower initial purchase orders on the group’s own-brand products. 

Asos also plans to adopt a stockless model for the partner brands it sells on its platform. Investors seem reasonably optimistic about the changes, with the group’s shares ticking upward by around 4 per cent on the morning it published its interim figures. It helps that the company also posted its strongest first-half cash generation since 2017.

But in the short term, top-line growth is well out of reach. Management has reiterated guidance for a sales decline of 5 to 15 per cent for the full financial year.

HOLD: Saga (SAGA)

The travel division of the insurer has returned to profit for the first time since the pandemic, writes Mark Robinson.

There was always a concern that certain industries would be permanently hobbled by the pandemic — a kind of corporate long Covid. The cruise industry was one of the first high-profile victims of Covid-19, and there were concerns that travellers might be reluctant to return to sea if they thought they were boarding a floating Petri dish. Saga’s latest full-year figures suggest that these concerns may have been misplaced.

Saga’s ocean cruise division exceeded expectations, posting underlying profit before tax of £35.5mn, up from £700,000 in the previous year, while the river cruise segment reported underlying profits of £3mn, compared with a loss of £5.1mn in 2022-23. Per diem rates were also on the rise, although that needs to be set against persistent inflationary pressures. Bookings for ocean cruises remain “exceptionally strong”, leading to a load factor of 78 per cent for 2024-25, a 4 percentage point increase over the previous year. That figure stood at 82 per cent in the year before the pandemic.

The travel division returned to profit for the first time since the pandemic, while revenue was 44 per cent ahead of the previous year. Elsewhere, the insurance broking/underwriting businesses were constrained by inflationary effects, leading to pressure on margins and operating ratios and an accompanying 53 per cent drop in underlying profit to £38.4mn.

Net debt has been pared by 10 per cent and the steady improvement in cruise metrics is buoying operating cash flows, doubly important as it will help the group meet a £150mn bond repayment due in May 2024. The lowly forward rating of 3.8 times consensus earnings reflects the ongoing scale of the challenges faced by Saga, but shareholders will find some comfort in these figures.