Moonpig (MOON) looks like a very good business that is benefiting from a temporary windfall. Its long-term strategy may deliver good results but investors might be better off waiting for a more favourable entry point.
Over the years I’ve become very sceptical of IPOs coming from private equity sellers. In too many instances they have been very good at selling out at the top when profits have peaked whilst leaving new shareholders saddled with a debt stuffed balance sheet.
Moonpig’s recent IPO does not look like this. Granted, the business floated on the wave of booming trading conditions at a valuation that looked punchy on a lower level of normalised profits, but the selling shareholders are keeping a significant stake in the business – at least for now. While the business does have some debt it is not at levels that would threaten the new shareholders too much.
Here, I take a look at its business and weigh up its long-term prospects.
Moonpig is the leading online seller of greetings cards in the UK with a 60 per cent share of the market. It also owns a similar business in Holland called Greetz which has a 65 per cent share of the Dutch online cards market. The company’s revenues and profits are dominated by the UK business.
Moonpig began life in 2000 in an attempt to offer people much better card designs than were available in high street shops. It has done a good job in doing so. The business has previously been sold in 2011 and in 2016 and bought Greetz in 2018.
Customers are offered a choice of over 20,000 card designs and over 1,000 gifts that are sold on the websites Moonpig.com in the UK and Greetz.nl in Holland. Around one-third of annual sales are made on mobile devices via the Moonpig app. The combined business had 12.2m active customers as of October 2020.
Moonpig produces the bulk of its cards at its in-house printing facility in Guernsey. Cards are printed on demand and qualify for next day delivery from Guernsey if they are ordered by 5pm. There is a 9pm ordering cut off time for orders fulfilled from sites on the UK mainland. Greetz has a next day cut off time of 10pm for qualifying orders.
The business is backed by a significant investment in software development and data analysis employees aimed at giving customers a better and hassle free buying experience. As there is no guest buying facility, all customers have to have an account to buy products. This allows for the collection of valuable customer data to give a more personalised experience with recommendations and reminders of regular card buying dates.
The cards range in price from 99 pence for e-cards to £10 for giant cards. Most of these are delivered by regulated national postal services and can be tracked online.
Moonpig’s business strategy is based on acquiring card customers first and foremost and then selling them gifts to attach to their order. This makes the cost of acquiring gift sales effectively zero as the customer is already captive and makes a lot of sense.
45 per cent of Monnpig’s gift sales are flowers or houseplants, but customers can also buy chocolates, alcohol, balloons, candles, books, beauty products and other accessories. These are delivered by selected third parties with card printing facilities on site.
Along with the cost of website and e-commerce development, marketing is a major revenue investment for the business. The company advertises on TV and radio, pay per click advertising on search engines as well as deploying algorithms and search optimisation techniques through internet search engines. It also employs direct email marketing techniques.
Moonpig has been very successful in improving the effectiveness of its marketing in recent years and has driven down the cost of customer acquisition. 84 per cent of customers now come directly to it and the cost of acquiring new customers has come down 29 per cent since 2018.
As well as winning new customers, keeping hold of existing ones is no easy task. Around 78 per cent of annual revenues come from previous customers. Over two years this number falls to nearer 50 per cent and represents an area where sales efficiency and revenue generation can improve.
62 per cent of customers are female with 40 per cent of total customers under the age of 35. Last year, the average Moonpig customer sent 24.2 cards.
This is a business that is producing some very impressive numbers. Not only is it very profitable but it also has low capital requirements. It doesn’t have to hold a lot of inventory as cards are printed on demand and the cost of paper is low. It does hold a small gift inventory, but much of this is held by third parties. As a result, the company tends to generate cash inflows from working capital rather than consume them.
Despite a low ongoing inventory requirement most of the time, the business has the flexibility to scale up its daily activity by a factor of three to meet peak periods of demand such as Valentine’s Day, Mother’s Day, Father’s Day and Christmas.
Gross margins are in the mid 50 per cent range and are pretty stable. If we take a closer look at the business, we can see that revenues have essentially been driven by order volume as the average revenue per transaction has not shown much significant movement in recent years.
|Moonpig: Order volumes and Revenues|
Moonpig order (m)
Greetz orders (m)
Total orders (m )
Moonpig sales £m
Greetz sales £m
Moonpig revenue per order
Greetz revenue per order
|Source: Moonpig/Investors’ Chronicle|
When it comes to gross margins, the Moonpig business is more profitable than Greetz. It is also worth bearing in mind that the gross margins on gifts are lower than those earned on cards and as gifting becomes a bigger part of the revenue mix this is likely to dilute overall gross margins.
This dilution is offset by the fact that the marketing cost associated with attached gifting sales is essentially free due to the cards first customer acquisition strategy.
|Moonpig: gross and Ebitda margins|
|Moonpig gross margin %|
Greetz gross margin %
Total gross margin %
Moonpig Ebitda £m
Greetz Ebitda £m
Total Ebitda £m
Moonpig Ebitda margin
Greetz EBITDA margin
Total EBITDA margin
Moonpig’s revenues are also subject to a reasonable amount of operating leverage as the IT, marketing and card printing facility costs are essentially fixed. This effect is shown in the step change in Ebitda margins since the end of 2019 as the company has benefitted from a big Covid-19 lockdown boost in revenues.
Operating leverage of course works both ways, but investors will take comfort from the historic resilience and stability of card sales in recessions. However, they are likely to see it work in both directions after exceptional trading strength this year due to Covid-19 lockdowns and when trading conditions are expected to normalise next year.
When its margin characteristics and low capital intensity are combined it gives a business that produces some very impressive financial performance numbers in terms of key quality metrics such as return on capital employed (ROCE) and free cash flow. Unlike so many private equity flotations, it is good to see that this business has not been stuffed with debt.
|Moonpig: Key financials|
Free cash flow
Debt to FCF
Net debt to FCF
|Source: Moonpig/Investors’ Chronicle|
Growth potential and competitive positioning
The market for cards has not grown much over the past decade and is unlikely to do so going forward. What is more likely is that the card buying will shift more towards the internet and away from bricks and mortar card sellers.
OC&C, a consultancy, estimates that the UK card market is worth around £2bn in annual sales with the Dutch market valued at around £300m. It forecasts that online penetration in the UK will increase from 10 per cent in 2019 to 20 per cent in 2024. Over the same period, internet sales are expected to increase their share of the Dutch card market from 13 per cent to 19 per cent.
Moonpig and Greetz with respective online market shares of 60 and 65 per cent are well placed to grab a decent chunk of this growth but it faces significant competition from offline sources such as supermarkets, Clinton Cards, Card Factory (CARD), WH Smith (SMWH) and Home Bargains, some of which offer attached gifting as well.
In the online space, the likes of Funky Pigeon, Thortful and Touchnote offer comparable services to customers.
That said, I think it’s fair to say that Moonpig has some competitive advantages when it comes to online cards. Its big market share is testament to the level of brand awareness it has built over the years whilst its large customer base and the data that comes with it gives it an edge when it comes to marketing, If you visit its website, the range of cards, gifts and personalisation on offer is impressive and backed up by a good buying and delivery service.
When it comes to gifts, the competitive landscape is much different and arguably more fierce. Moonpig is up against the likes of Amazon (US:AMZN), John Lewis, Etsy (011W) and Not on the High Street amongst others. If you are looking to send someone a gift to celebrate an occasion and you are ordering online, it does beg the question as to whether you get your gift from a card seller or your card from the gift seller.
Moonpig’s strategy for growth is to get more orders from existing customers and improve its long-term customer retention whilst benefiting from its markets moving online. By adding gifts, it can then leverage its costs and drive revenues and margins higher. Recent history suggests that it is capable of doing this.
The problem for investors is that Covid-19 seems to have already delivered a trading windfall that would have been the same as many years of decent growth without it. With many high street sellers closed for business, Moonpig has seen orders and revenues soar over the last year.
The huge improvement seen at its half year results to October 2020 has continued with very impressive trading over Valentine’s Day. When the company reports its results for the year to April 2021 they are going to look fantastic with revenues expected to have doubled from the year before with operating profits almost doing the same.
Free cash flow
Despite higher marketing costs to bring on more customers and the lockdown in Guernsey hitting capacity from its card printing site, the company continues to believe that most of the current windfall is temporary and has not changed its guidance for 2022 from what it set out in its IPO prospectus.
It is guiding to revenue growth of 34-38 per cent on April 2020 levels which gives revenues in the range of £230-£240m, with current consensus slightly higher at £255m. Over the medium term it is targeting mid teens revenue growth and Ebitda margins in the 24-25 per cent range.
If this turns out to be the case, then it is going to be 2025 before revenues and profits exceed those expected in 2021. If Moonpig holds on to more of its new customers then there is scope for it to get there faster than expected.
If 2021 was to be the revenue and profit base to grow from then I’d be quite keen on the shares on a PE of 25 times. On 47 times 2022F EPS, my enthusiasm is dampened somewhat. A rosy outlook looks to be fairly reflected in the share price right now and investors may get a better entry point by holding off at the moment.
It is also likely that the selling private equity shareholders who still own over half of the shares outstanding will look to sell out once their year long lock up expires. This may not be a problem if Moonpig exceeds current expectations but the possibility of a large chunk of shares looking for a buyer needs to be considered nonetheless.