We reviewed Appreciate Group plc (LON:APP) business model in our initiation, Solid core + digital disruption = unique model, published on 1 September 2021, with an update following its interim results, Interim results: solid progress, digital delivering, published on 29 November 2021. In this note, we focus on a theme running through both those reports – the digitalisation of the business and how the modernisation of every aspect of procedures, cultures, products and management is fundamentally changing the prospects for the group. Delivery is now key, and so we detail the “proof of the pudding”: how APP is delivering the future today. Further evidence of this is expected with the April trading update.
- Benefits if delivered: Investors gain from higher earnings, with more sales (broader product range, new markets, higher shares in very large revenue pools) from an efficient platform driving economies of scale and with fewer error rates. The valuation rating is also likely to improve, reflecting the improved earnings outlook.
- Proof of the pudding so far: Administration costs are expected to fall by £1m (down 5%) this year, and peak season temporary staff are down 13%, despite higher volumes. Digital billings have more than quadrupled in two years, and HighStreetVouchers.com traffic was up 32%, according to the recent trading statement.
- Valuation: We use a range of valuation approaches, including a Gordon Growth Model (GGM), a Discounted Dividend Model (DDM) and a peer comparison. On the assumptions we outline later in the report, the average indicative valuation is 60p. As Appreciate Group is a growing business, there is upside potential moving forward the base year.
- Risks: FY’21/’22 was a challenging period for the Xmas Savings business, as lockdown restrictions affected agent activity. The digital model is positive, but it is still being developed, and the transition is not risk-free. Anything adversely affecting redemption/distribution relationships would be negative. There is a sensitivity to macroeconomics and near-term customer behaviour.
- Investment summary: Combining a profitable core, decades of experience, (especially in managing key partnerships) and the latest technology give Appreciate Group a unique fintech strategy. It is at the early stages of the transition to a digital model but has already attracted new partners like PayPoint. Comparable models are growing explosively and are on higher valuations. The accounting rules are unhelpful to understanding the business. Any fundamental strategic change introduces risk, and there is some economic sensitivity.