Appreciate Group plc

FY’22 results: going for growth

07 Jul 2022 / Corporate research

The FY’22 results beat market expectations and saw strong digital growth, as well as a return to more normal redemption patterns. Unsurprisingly, the shares have reacted since. We reviewed Appreciate’s (APP) business model in our initiation, Solid core + digital disruption = unique model, published on 1 September 2021, when we emphasised the importance of transforming the group into a growth, digital model. For us, the key to these results was not the short-term numbers, but rather the strategic growth. In addition to 20% digital billings growth, and further efficiency gains, APP announced an acquisition, expected to accelerate plans by 18 months.

  • Digitalisation: With these results, the benefits of a digital model showed in strong underlying billings growth, efficiency gains and the use of data to respond rapidly to marketing initiatives. APP expects falling administration costs (FY’23 £19m vs. £21m in FY’22), despite inflationary pressures. A new deal will accelerate delivery further.
  • Outlook: We believe APP is well-positioned for FY’23 challenges. Rising profits are expected with fallings staff costs (despite cost-of-living-related one-off costs), falling administration costs, rising business contributions, and rising interest income. There are further potential one-off benefits, which we detail in this note.
  • Valuation: We use a wide range of valuation approaches, including a Gordon Growth Model (GGM), a Discounted Dividend Model (DDM) and peer comparisons. As a growing business, moving forward the base year has a dramatic effect, as does the choice of comparator companies. The average valuation, within a wide range, is 71.6p.
  • Risks: FY’21/FY’22 was a challenging period for the Christmas Savings business, as lockdown restrictions impacted 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 APP 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.
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