Interim results: solid progress, digital delivering

We reviewed Appreciate’s (APP) business model in our initiation, Solid core + digital disruption = unique model, published on 1 September. On 23 November, APP released its interim results, reporting a modest seasonal loss, in line with the nature of its business. The key takeaways were i) continued progress in the rollout of the digital model, including both distribution and efficiency, ii) reversion to more normal customer patterns of redemption and in larger corporate client behaviour, and iii) growth in redemption partners, especially in hospitality, leisure and food. The Xmas Savings business is being reinvigorated. The full-year outlook is in line with expectations.

• Digitalisation: With these results, not only did digital distribution show strong growth, but efficiency benefits were also visible. APP expects falling administration costs, despite inflationary pressures. Fewer staff were required to handle peak volumes, and complaints are down. The peak of investment has passed.
• Outlook: APP sees the full year in line with expectations. Against our pre-results forecasts, billings are down, due to a slightly slower-than-anticipated start at PayPoint, and APP choosing not to renew a low-margin contract, offset by the lower costs. As shown below, a strong profit rebound is expected in FY22.
• 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 APP is a growing business, there is upside potential moving forward the base year.
• Risks: FY21/22 was a challenging period for the Xmas 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.