The suggestion to look at Park (LON:PKG) comes from a commenter on a previous post, so thanks for that. He noted that they had 'high returns on capital' and seemed 'very investor friendly', which is always enough to interest if the price is right. On top of that - and this is probably more of a kicker - he noted that they'd just raised more capital through the markets for growth. Companies which earn high returns on capital are able to put that money to particularly good use in compounding the capital of their investors, and so the suggestion of the expansion of an already successful business model has to pique some interest.
So what do Park do? Well, they're best known to me for their nauseating Christmas adverts with a fairy sprinkling magic on suitably awed looking families. That side of the business is a Christmas savings scheme - you put in money throughout the year in exchange for vouchers or products at Christmas, effectively spreading the cost of your Christmas shopping. I think it's a very sketchy business; the only time I ever think it's even reasonably logical is if you know you'll spend the money if you put it in a better savings scheme (like any time-deposit or even just a savings account), and a product which is only rational if you assume a large dose of irrationality on the part of the consumer seems dubious to me. The vouchers aren't actually that bad - you save, X a week for 52 weeks and get a voucher worth 52X at the end of it. You're not losing any money; the only loss is in the interest in the interim which, frankly, is negligible at the moment, and in return you get some peace of mind. The lock in isn't huge in these vouchers, since they're quite widespread - but you do have to pick (loosely or specifically) in advance where you want to spend the money. Here, the benefit is evident for retailers - Park can essentially tell retailers in January that a customer will have a voucher for Arcadia Group, or Debenhams, or wherever, for a certain amount of money. I say loosely because some of the cards have quite an array of retailers, so there is some slack in that.
The product side of things seems terrible, though. Here's a boxset of children's DVDs through Park, total cost £37.99. Here's the same product on Amazon for £18.19, delivered free. Saying that - I'm not sure I'm actually right. The pictures are the same, but if you read the description on the Park website you'll see that the product actually only has 5 disks (though their picture has a box saying '10 DVDs at the top'. I suspect their picture is wrong, and the product they're actually selling is this one, available at Amazon for £13.01. The names now match.
What a shambles - I'm trying to make a point and get sidetracked by admin confusion! Regardless, hopefully the point is evident - I don't feel like this product adds value for consumers.
I don't want to sound like I'm prosletysing for the church of savings accounts; 400,000 think Park add value and use them for their Christmas savings. I also note I've invested both in N Brown Group, another company with a business feature I strongly disliked, and H&T Group, who also (while being the best of a bad bunch) operate in a segment I'd rather didn't need to exist. My objection isn't a misguided moral one - I keep moral judgements, entirely personal as they are, completely out of this. It's more of a pragmatic one. If Park don't really add any value, and I'm right in my assertion, it follows that the business should falter with time. It hasn't, though. It's gone from strength to strength, and it recently expanded into Ireland. Take from that what you will!
I've spent far too long rambling on one side of the business, though. The other side is, to me, better. Their corporate side handles 'incentive and reward solutions' for retailers. Lots of vouchers and cards, again. In their page on 'Love2reward' (I hate names like this) they say that 'the most common reason given for leaving a job is the lack of a company reward scheme', which sounds absolutely ludicrous to me, but nonetheless is a reason that holds some sway with their 6537 corporate customers. There's more interesting admin stuff on this side of things, with what sounds like a more complete service offer - they have points systems and tailored online portals for the companies who sign up, for instance, allowing companies to cheaply set up incentive schemes. I mock the name and the marketing, but the principle seems sound. This is the sort of admin-intensive activity that can very easily be outsourced by business, at lower cost, to an expert like Park.
When I mentioned a high return on capital above, I meant a very high one. Businesses like this - based up in the air, like recruitment and consultancy, don't really need a fixed asset base. It's essentially financial services. My usual calculation of return on capital - adjusted operating profit after tax (adjusted for lease accounting and exceptionals) divided by the fixed asset base, defined as working capital + capitalized leases + property, plant & equipment - doesn't churn out a meaningful figure. That's because working capital is very negative; the company manages cash in a way which means its obligations are always higher than its liquid assets. This might be a cause for concern; standard investing guidance usually talks about the need to have a good 'current ratio', the level at which your current liabilities are covered by your assets. As ever, I think there's much more nuance in it than that. The ability to operate a negative working capital cycle is a great boon for a company, since it means they're able to enjoy what is essentially free finance. The important bit is simply that it doesn't come crashing to a halt. To understand that, you need to look at what the liabilities are.
In Park's case, they're mainly in the all-encompassing 'trade and payables' line, and in provisions. Provisions, in their case, are unredeemed vouchers - money that they expect to be leaving soon, because the customer will use the voucher and they will be obliged to reimburse the retailer. Given their history, I imagine Park are quite good at anticipating cash flows from these - they can see what the average time to redemption is, for instance, and thus plan accordingly. Trade & other payables, similarly, represents the prepayments which customers have put into the business for their Christmas vouchers and goods. Similarly to the provisions, this is an outflow which is wholly predictable. In this sense, Park's 'deficit' in current asset value certainly isn't as worrying as it is in some cases. It is a feature of their business model. They have no bank debt, and since cashflows should be preditable, the situation seems unworrying. I say seems - things can always go wrong, in which case it's nice to have a bunch of cash sitting on book - but you have to counteract that with the cost of having a non-productive asset sitting there. The risk/reward of that situation entirely depends on your opinion of management. They've managed for over 40 years now, though, and through both the recession - the time you would've thought cash was most squeezed as consumers thought twice about giving any money away - and the collapse of Farepak, the Christmas hamper business, which understandably put an enormous dent into consumer confidence in these schemes and which brought about a more regulated industry - the money's now held in a trust.
EBITDA is a decent chunk higher than operating profit, as we can add back the amortisation of intangibles, an entirely non-cash cost on an entirely irrelevant (to me) accounting asset. Operating profit itself isn't actually that good a figure for Park, since finance income/costs aren't simply a result of financing matters. For most companies, we chop out the cost of interest payments on debt - since they have nothing to do with the operations of the business, and are just a function of whether the business chose to finance with debt or equity. For Park, though, finance income is a part of its strategy. After all, it's taking money from customers throughout the year and giving it back to them at Christmas - it pockets the interest in the meantime. With cash balances peaking at £190m last year, this isn't anything to be scoffed at.
It also hints at a possible area for recovery. Finance income has plummeted over the last few years as interest rates have bottomed out. Since the money has to be held in an extremely low-risk trust, interest rates are highly relevant to the return that can be expected; see the graph on the right. You could probably pencil in £1.5m more in annual interest income for the group at its current size in a 'normal' interest rate environment, whatever that means. The 'Christmas order book' line on my graph right is probably related to the amount of cash the group has to earn interest on in a very downward-skewed way, too; with all their new schemes, I would've thought their average cash balances were higher than this might suggest.
Either way, the company isn't exactly expensive now, anyway. Adding back in amortisation of intangibles to the net profit figure puts them on a P/E of about 12, and if you're the type to exclude depreciation on property that'll bump up the earnings even further. The finance income business seems to act as a natural hedge against rising interest rates (which supposedly hit consumer demand) but, given the mechanics of an interest rate rise - it's only likely to happen when consumer confidence is improving anyway, and thus households are more willing to spend - I would hazard a guess that there's probably more potential on the upside than down.
That's the business as it stands now, then, and remember it's expanding - they raised £4.4m for the 'next phase of growth', and the statement with the equity raising sounded extremely bullish. They're talking about expansion into Europe, obviously a huge potential market, and further growth in the UK and Ireland. It clearly increases risk, but perhaps less so than in other companies. The capital investment is certainly lower than in many industries. One thing does irk me slightly about the equity raising - at £4.4m, it's only a little higher than the £3.6m they paid out in dividends last year. Given the fees associated with raising capital, this just seems like a waste of money. Perhaps it was done to ensure the group's record of increasing dividends, not that that's a particularly good reason.
There's clearly potential here, if I can get past the aching sense that the primary business doesn't really add any value for customers. What really matters is not what I think, but what the customers think. If they continue to believe it provides them with a useful service, they'll keep paying, and that's the bottom line. It's an inexpensive looking share with interesting economics and growth prospects.