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09 February 2021

Free from Europe and Heading for the Moon

We had been warned that post-Brexit corporate Britain would be stricken to the back of the queue and left to struggle on the global stage. But if the first few weeks of 2021 are anything to go by, investors ought to be looking towards the future with surquedry.
 
In the same week when the City of London agreed to bring back Swiss stock trading, worth an estimated €1.2bn in daily trades, London cemented its status as Europe’s leading technology hub, having raised more than US$10bn in funding last year, a larger slug of venture capital funding than any other European city. This, alongside the news that the UK economy beat forecasts for November, paints a positive picture for the future of post-Brexit Britain.
 
Contributing to this view was Moonpig, the online greeting card retailer, which announced plans for a £1.2bn market listing at the end of January. Moonpig was founded 20 years ago by Nick Jenkins, previously a sugar trader at Glencore, who named the business after his school nickname to make the company stand out in a Google search; Mr Jenkins sold out for £100m in 2011.
 
Moonpig has been owned by exponent private equity since 2016 and, importantly, the private equity house is believed to want to retain a substantial stake after the listing; clearly, it believes this beast has further to run. Not only does this provide an injection of confidence to the wider business environment, the announcement is also a step in the right direction for our domestic equity market, which is currently dominated by the old economy and light on tech stocks.
 
Moonpig has been one of the winners of the past ten months. With consumers unable and/or unwilling to venture into a bricks-and-mortar store to purchase birthday cards and other niceties, demand has shifted online. That Paperchase filed notice to appoint administrators earlier this month, which sits together with the demise of Card Factory, whose shares have fallen by c.60% over the past year, while Moonpig saw sales grow by 135% to c.£156m in the six months to October, perfectly illustrates the changing market demographics. While the COVID-19 induced lockdowns have undeniably provided a tailwind for the company, growth can be traced further back; Moonpig’s sales grew at a compound rate of roughly 13% over the five years before the pandemic.
 
With 80% of revenues coming from returning customers, the company has clearly cemented a sticky and reliable client base which should filter into subscription-like revenue streams; after all, birthdays are amongst the most certain features of life, while Britons buy more greetings cards than any other nationality per head. Moonpig has focused its operations in the UK and the Netherlands and has smaller outlets in the US and Australia, and the group is well-placed in its domestic market, boasting a 60% share of Britain’s online card market. With only 10% of the overall card market based online, the growth prospects are visible for all to see. Greater international expansion and integration could also be on the cards.
 
Make no mistake, Moonpig is more than merely a card retailer. As with all leading technology companies, data is king. Moonpig will fuse the data it collects with specially designed algorithms to know exactly why, when and what consumers demand. Additionally, 44% of revenues in the six months to October came from gifts, with the company targeting the sweet spot of £15 to £25 items, while the group is also considered one of the five largest florists in the UK; this variety of revenue streams will help to smooth any bumps in the road.
 
But despite all this, Moonpig’s greatest strength could be in the form of company chair Kate Swann. Ms Swann has previously transformed and revitalised both WH Smith and SSP, revamping the former from an underwhelming retail outlet, to a travel-focused hub of convenience.
 
With earnings before interest, taxes, depreciation, and amortization (ebitda) margins of 26% and predicted full-year earnings of close to £80m, double last year’s result, the proposed £1bn valuation would price Moonpig at close to 12x earnings. This seems reasonable. The closure of physical competitors, alongside the digitisation of the greeting card and florist markets, should act as a springboard for Moonpig’s future growth, while the company enjoys an expanding and reliable customer base and a diversified source of revenue streams. The possibility of international expansion adds some extra jazz. Other companies such as the footwear producer Dr Martens, the online food delivery platform Deliveroo, and Darktrace, the cybersecurity group, are all eyeing stock market flotations in 2021. London clearly remains an attractive venue for business investment and at the centre of the European financial market. Salut to 2021.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.

 
Free from Europe and Heading for the Moon

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