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A good time to bite into Moonpig

While performance has fallen back after a pandemic bounce, the long-term argument for Moonpig still looks convincing
December 30, 2021

Moonpig (MOON) was already a high-growth company before it was turbocharged in its last fiscal year as lockdowns and changing consumer trends benefited ecommerce retailers. But when the likelihood of lower future revenues was floated by the group this summer, investors responded as though they had ripped open a Moonpig card to be greeted with some ghastly news.

Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Market leader
  • Leading brand
  • Strong underlying growth
Bear points
  • Pandemic bounce reversing
  • Debt has risen

The shares of the online greeting card and gift retailer have been on a bumpy ride since February’s listing on the premium segment of London’s main market. When Moonpig’s maiden post-initial public offering (IPO) results were released in July, management noted that the top line would fall in the next fiscal year as restrictions were eased. The shares fell from a post-float high of 488p in June to a low point of 285p in October as IPO investors glumly mused over whether they had overvalued the business. But the company is now trading back above its float price of 350p once again.

Moonpig’s main trading locales are the UK and Ireland and the Netherlands, with the group doing business under the Greetz brand in the latter. In both markets, it is the leader in online card retail. The UK and Ireland market is its top-line driver, taking three-quarters of revenue in the latest results – the interim postings for the six months to 31 October. The group also posts small amounts of revenue from the US, Belgium and Australia.

Technology is playing a greater role within the group’s sales. Almost half – 42 per cent – of customer orders came via Moonpig’s mobile app in the half-year period. This is part of a general industry trend in the online card market, with a recent IBISWorld report noting that such technology “has allowed industry participants to extend their operations and cater to an untapped market”. Moonpig isn’t letting the opportunity go to waste.

While chiefly known for its greeting cards, Moonpig’s gift offering is a growing part of the business. Gifting took its largest ever share of revenues in the interim results, at 48 per cent of the total. Moonpig’s business model aims to attract customers through its greeting cards, and then to highlight and sell them gifts alongside this. To give only a handful of examples, gifts include flowers, plants, fragrances, hampers, books and alcohol – a new partnership with Virgin Wines (VINO) has supplemented its existing offering for thirsty gift recipients.

Moonpig’s brand equity is central to the group’s success. It’s a challenge to resist humming the “moonpig.com” advert refrain while discussing the company. Brand awareness is made apparent in new and existing customer data. In the interim results, 89 per cent of revenue was from existing customers while management also noted that Moonpig has been able to “consistently acquire new customers at a faster rate than before the arrival of the pandemic”. Marketing costs haven’t exploded as part of this, andhave actually fallen after the removal of lockdown restrictions.

The group’s leading market position, combined with strong brand equity and customer loyalty, is its economic moat. Competitors such as Funky Pigeon – owned by WH Smith (SMWH) – and Card Factory (CARD) struggle to compete with Moonpig’s scale. 

 

Pandemic bounce

The interim results were up against tough comparatives. The pandemic-induced boom in the year to 30 April 2021 saw Moonpig’s revenue more than double to £368m, but the results also indicated that this bounce would soon come to an end as the group warned of the “normalisation of purchase frequency” ahead. This has come to pass. Revenue was, unsurprisingly, down by 9 per cent from £156m to £143m in the interim period.

To demonstrate just how much of a spike fiscal year 2021 represents, management and broker growth estimates suggest that that year’s level of sales won’t be achieved again until at least 2025. But, importantly, the interim results reported that the top line more than doubled – growing by 115 per cent – against the same period in pre-pandemic 2019.

This is a key point. Despite revenue falling back against the previous period’s booming performance, Moonpig remains a high-growth business. In the short term, management forecasts revenue for the full fiscal year at the upper end of its guidance range of £270m-£285m, which at the midway point would be more than £100m up on two years ago. In the medium term, it is targeting annual revenue growth “in the mid-teens”. This aim looks achievable given historic growth rates and recent evidence from the interim results – there were 10m more delivered orders than in the 2019 comparative.

Moonpig’s business model is working well in a tough economic environment. Its strategy means it is relatively protected from the inflation and supply chain headwinds that are pounding other listed companies. It is helped by what the group describes as an “inventory-light model with short supply chains”. Moonpig does not directly source from outside of Europe, and its most significant cost-of-sale item for greeting cards is postage – which is passed on to customers. While the group has had to absorb some non-material price rises in wages and packaging, HSBC analysts said that “in the absence of the supply chain or inflationary cost pressures facing other UK online retailers, Moonpig appears well-placed to deliver on its margin aspirations”.

Those aspirations are for an adjusted Ebitda margin of 24-25 per cent over the medium term. This target has been hit in recent times, with 24.5 per cent posted in the interim results. The gross margin, meanwhile, has been slowly declining. This was at 49 per cent in the interim period, but has historically been in the 50 to 55 per cent range – indeed it reached 55 per cent in the 2018 fiscal year. The margins on cards are higher than on gifts, and as gifts continue to take an increased slice of the revenue pie, the downwards gross margin trend could continue.

 

Tasty fundamentals

Moonpig can boast some impressive financial metrics. Free cash flow (FCF) before finance charges is on the up, with JP Morgan analysts forecasting £50m then £63m for fiscal years 2023 and 2024, respectively – this would give a FCF yield of 4 and then 5 per cent.

However, a significant increase in debt in recent times looks concerning. Net debt was £113m at 31 October, which was down by £2m from the year-end but a large jump from £31m at 2020’s interim date. Investors can be soothed somewhat by the fact that this was mainly driven by the rejigging of the group’s capital structure around the IPO. Moonpig entered into a £195m senior facilities agreement at the start of 2021 because of this, taking on liabilities from former guarantors.

JPMorgan has the shares trading on a forward price/earnings ratio of 36 times, which then falls to 31 then 27 for fiscal years 2023 and 2024, respectively. This looks relatively undemanding, given medium-term revenue growth prospects and the broker’s forecast of a “long-run Ebitda margin of 29 per cent”.

It wouldn’t be foolish to argue that the uncertainty over the Omicron coronavirus variant could benefit the group. Nervousness over high-street shopping could drive consumers into Moonpig’s hands – or trotters – in much greater numbers. But investors attracted only by short-term pandemic prospects should think again. On a longer view, with strong underlying fundamentals and growth expectations, Moonpig looks like an attractive option. 

The shares are still trading well below the summer’s peak, and now could prove a good time to buy in.

Company DetailsNameMkt CapPrice52-Wk Hi/Lo
Moonpig  (MOON)£1.27bn372p500p / 280p
Size/DebtNAV per share*Net Cash / Debt(-)Net Debt / EbitdaOp Cash/ Ebitda
Net Liab-£113m-70%
ValuationFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)CAPE
33-3.0%-
Quality/ GrowthEBIT MarginROCE5yr Sales CAGR5yr EPS CAGR
20.4%121.7%--
Forecasts/ MomentumFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
-15%-0.6%9.2%
Year End 30 AprSales (£m)Profit before tax (£m)EPS (p)DPS (p)
201912013.9-nil
202017331.86nil
202136874.817.7nil
f'cst 202228244.410.3nil
f'cst 202331051.711.8nil
chg (%)+10+16+15-
source: FactSet, adjusted PTP and EPS figures 
NTM = Next Twelve Months  
STM = Second Twelve Months (i.e. one year from now)