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BUY: FD Technologies (FDP)
The new KX Insights platform is increasing recurring revenue quickly, writes Arthur Sants.
At FD Technologies it is a case of the good outweighing the bad. The company is made up of three business: the new data analytics cloud platform, KX Insights; a financial services consultancy business, First Derivatives; and its marketing platform MRP. KX and FD had strong years, but this was partly offset by a sudden fall in growth in the marketing business.
Starting with the bad, MRP’s revenue dropped 8 per cent in the first half and is expected to be down 8 per cent for the full year. Given management was forecasting 10 per cent growth this is a big miss. The blame is, probably fairly, placed on the worsening macroeconomic conditions. To mitigate the impact, £3.5mn of costs are being stripped out of MRP.
The good news is that MRP is the smallest part of the group. Revenue made up just 16 per cent of the group total. First Derivatives provides 58 per cent and the remaining 26 per cent comes from KX Insights. First Derivatives’ revenue rose 22 per cent, ahead of the 15 per cent expectation. However, because of rising wage inflation, the gross margin slipped one percentage point to 27 per cent.
KX Insights has a much larger gross margin of 72 per cent, rising from 69 per cent last year. This is because it benefits from economies of scale as R&D and marketing expenses get spread over a larger customer base. To justify the FactSet consensus forward PE ratio of 30 most of the sales growth will need to come from KX.
In the first half revenue rose 19 per cent. This was slightly slower than First Derivatives. However, if service sales, which dropped 11 per cent, are stripped out, growth was 35 per cent. Service revenues come from billing the customer for installation, therefore a fall is actually a sign of a more intuitive product.
Next half of the year, KX will receive the tailwind of the partnership signed with Microsoft Azure which means Microsoft sales teams will now be pushing KX to their huge customer base. Some sales have already been made through the partnership and it is expected to pick up in the second half of the year.
KX annual recurring revenue growth was 41 per cent, ahead of the forecast of between 35 and 40 per cent. Broker Peel Hunt thinks KX is “increasingly looking like a hidden gem” and with that ARR growth rate we tend to agree.
HOLD: International Distributions Services (IDS)
Trading update reveals chaotic state of the UK postal service, writes Jemma Slingo.
Royal Mail has warned that it could swing to a loss of up to £450mn and be forced to axe as many as 10,000 jobs, in response to “damaging” industrial action.
The postal service — which has reinvented itself as International Distributions Services (IDS) — reported a UK operating loss of £219mn between April and September this year, and a trading cash outflow of £274mn. Management claimed that strike action had already cost the business £70mn, and complained that “agreed productivity improvements” had been obstructed. Shares have fallen by 10 per cent in response to the trading update.
The Communication Workers Union has staged six days of industrial action so far this year, and has formally notified Royal Mail of a further two days of strikes this month. Workers have also threatened to strike for 16 days in the run-up to Christmas.
The group is braced for a full-year adjusted operating loss of around £350mn, excluding voluntary redundancy costs. However, it said this may increase to £450mn “if customers move volume away for longer periods following the initial disruption”.
Royal Mail estimates that it will have to cut around 5,000 full time roles by March 2023 and 10,000 by the end of August 2023, on a rolling 12 month basis. This is likely to involve between 5,000 and 6,000 redundancies.
The group announced a transformation plan in 2019, and identified savings of £350mn from job cuts, route improvements and automation. However, the strategy has prompted a fierce backlash from workers. Meanwhile, letter volumes have fallen by 24 per cent since 2019, and parcel volumes have plateaued.
Amid the turmoil, there is a glimmer of hope. General Logistics Systems (GLS) — the group’s international arm — is on track to meet full year expectations of an adjusted operating profit between €370 — €410mn (£319 — £353mn). Earlier this year, management said it would consider separating Royal Mail and GLS unless “significant operational change” was achieved in the UK.
HOLD: Asos (ASC)
The new chief executive is banging the drum for a revised business model as he tries to turn things around, writes Christopher Akers.
Asos’s new commander-in-chief, José Antonio Ramos Calamonte, has a lot on his plate. The fast-fashion retailer’s share price has plummeted over the past year as the pandemic online shopping boom fades into history, discretionary spending is pummelled by the cost of living crisis, and inflation and supply chain headwinds hit margins.
This week’s results highlight the scale of the challenge. Asos fell to a statutory loss as chunky costs, including £25mn spent on strategic change initiatives and £19mn of impairment charges, combined with flat revenues to push it into the red. Withdrawal from the Russian market hit profits by £14mn, active customer numbers were flat at 26mn, average basket value was down by 5 per cent to £38, and the gross margin fell by 180 basis points to 43.6 per cent due to high sea freight rates.
Calamonte recognises that change is needed. He unveiled a “new commercial model” which is intended to cut costs and improve stock management, with a stock write-off of £100mn-£130mn expected. Relatively poor non-UK performance will result in a reassessment of “resource and capital allocation”, an important step. But the company expects lower capex (capital expenditure) and another loss for the first six months of 2023, with a return to positive cash generation in the second half.
Stifel analysts said that Asos’s conundrum is “how to generate positive cash flow when profit margins are kept low by still high freight costs, marketing and increased competition and yet capex must be spent on technology and infrastructure”. Investors will be hoping that the company’s new approach will swiftly bear fruit and will spur positive momentum, with the share price boost on results day and the renegotiation of banking covenants good signs. But the short term will remain challenging.
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