Findel Post-Close Update
Edison | Apr 08, 2015 06:49AM ET
Lowering estimates
Although we have reduced our estimates following Findel's (LONDON:FDL) post-close statement, we have not lowered our valuation. Our previous valuation was based on a sum-of-the-parts methodology using interim core net debt. Guidance is that year-end core net debt will be substantially lower than that. Also, the group’s largest and most important business continued to grow strongly.
Reduced estimates
We have reduced our estimates for FY15 and beyond, principally to reflect weaker than expected Q4 trading in the education supplies business. We have also excluded Kleeneze, where we had modelled a small H2 EBIT contribution, from our estimates: Findel sold Kleeneze in March 2015 and it will therefore appear in the income statement as a discontinued business.
Profits recovery continues
Despite the setback in education, we nevertheless expect FY15 adjusted pre-tax profit to increase by more than 10%. The all-important Express business delivered “strong” operating profits growth based on revenue growth of 4.8%. Although still loss-making, Kitbag reduced its losses following a second half of strong revenue growth.
Valuation: Debt reduction underpins valuation
In our initiation note published on 21 January, we valued the group conservatively at 310p per share. In that calculation we ascribed no value to Kleeneze, which sold recently for £3.4m. Until we receive more detailed financial disclosure in the preliminary announcement, we are not changing that assessment. Although we have reduced our valuation of the education business to reflect its weak recent trading and near-term outlook, we now have more up-to-date information on core net debt and this is substantially lower than the level at the end of H1, which we used in our previous valuation. Given the disappointment of reduced estimates, a discount to sector P/E ratios is to be expected. However, the scale of Findel’s discount appears to overlook the extent to which the successful Express business dominates group profit and valuation. Findel trades on c 2x book value.
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