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Tandem’s value opportunity

A lowly rated and cash-rich distributor and retailer of sports, leisure and mobility equipment is well placed to profit from booming e-cycle sales
Tandem’s value opportunity
  • 2021 pre-tax profit slightly ahead of market forecasts
  • Annual revenue up 10 per cent to £40.9mn

Birmingham-based Tandem (TND:530p), a designer, developer, distributor and retailer of sports, leisure and mobility equipment has delivered another year of profitable growth that will outpace house broker Cenkos Securities’ forecast of 15 per cent higher pre-tax profit of £4.6mn.

On this basis, expect EPS of 74.7p to support a slightly higher payout of 9p, implying the shares are rated on a miserly price/earnings (PE) ratio of seven, less than half the rating of its peer group. That’s a harsh rating considering the multiple demand drivers behind the performance and the fact that Tandem’s gross margin appears to have held up remarkably well in the face of higher input costs, shipping and transport rates.

Tandem’s own-brand products include in-house designed and developed wheeled toys, outdoor toys and play equipment (swings and trampolines), which are sold under a mix of licences and own brands (split 55:45). They are less sensitive to swings in market demand and fads given their nature. Hedstrom, Stunted and uMoVe were among the top sellers last year.

Licences are mainly for children’s bikes, scooters, tricycles, skateboards and helmets where Tandem has a dominant market share, creating a barrier to entry for rivals. This explains the longevity of licenses such as Thomas & Friends (held for 24 years), Batman (11 years), Peppa Pig (10 years), Disney (six years), Paw Patrol (six years), LOL Surprise (four years), and Barbie (two years). They continue to be very popular, too.

The same is true of bicycles, the segment accounting for around 30 per cent of group sales. For instance, Tandem’s lightweight Squish branded children’s range delivered 31 per cent year-on-year sales growth. Reassuringly, stock availability is improving to fulfil orders, demand is not a problem as the pandemic has persuaded more of us to take up cycling as a leisure pursuit and for commuting to avoid public transport.

Tandem also offers a play on e-bikes – sold under the group’s conventional bike brands (Falcon, Dawes, Claud Butler and Elswick) – and e-scooters (brands Li-Fe and Wired). Both are becoming increasingly affordable due to the ongoing reductions in the cost of lithium-ion batteries. It’s not the only thing in their favour as they can store more energy per kilogram of weight so are more efficient than lead-acid batteries, thus highlighting the potential for even greater cost savings at a time when petrol prices are sky high.

Although e-bikes are categorised as regular push bikes in the UK (so can be ridden on cycle lanes and are exempt from mandatory motor vehicle insurance), at present it is only legal to ride e-scooters on private land. However, if they are legalised for use on public roads (to help accelerate the move to greener forms of transport), it will present a huge opportunity for companies such as Tandem to capitalise on.

That possibility is certainly not in the price with the shares trading around my 550p entry point, having been as high as 660p after I initiated coverage (Alpha Report: ‘A lowly-rated consumer play on electric bikes and scooters’, 11 October 2021). A cash-rich balance sheet is funding the cost of a warehouse expansion which is another positive as is almost £8m of freehold property assets. I maintain my 775p target price. Buy.

 

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