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Sitting tight through an uncomfortable ride

A distributor and retailer of sports, leisure and mobility equipment has been impacted by the challenging retail environment, but still offers growth drivers for an earnings recovery
Sitting tight through an uncomfortable ride
  • Revenue down 43 per cent in the 17 weeks to 30 April 2022, but 8 per cent higher in the seven weeks to 17 June 2022
  • Analysts downgrade full-year pre-tax profit and earnings per share (EPS) estimates by 62 per cent to £1.4mn and 22.2p

Birmingham-based Tandem (TND:245p), a designer, developer, distributor and retailer of sports, leisure and mobility equipment, is feeling the impact of the ongoing cost of living crisis.

In a first-half trading update, the directors revealed that revenue declined 31 per cent in the 24 weeks to 17 June 2022, albeit in the past seven weeks of that period it increased by 8 per cent. Although Tandem’s toy, sport and leisure business held up well, growth in bicycle sales reversed, dipping by more than half as demand that buoyed sales during last year’s pandemic lockdowns diminished. As a result, Tandem is holding higher stock levels than it had anticipated, so is planning several promotions and special offers to stimulate sales.

The group’s home and garden division suffered a similar revenue decline as cash conscious consumers held back on discretionary spend. E-mobility sales were sluggish, too, down a quarter, but are still up 90 per cent on the first half of 2020. The challenging backdrop is highlighted in the current order book (£10mn), which is more in line with the same stage of 2020 (£10.8mn) than last year (£35.4mn).

Reflecting the weaker first-half performance, house broker Cenkos Securities downgraded full-year revenue estimates from £38mn to £30mn (split £13mn in the first half and £17mn in the historically much stronger second half), the impact of which is a sharp downgrade in pre-tax profit forecasts from £3.6mn to £1.4mn. Factoring in £5mn of expected capital expenditure this year, which includes the completion of a new warehouse scheduled in the fourth quarter, and lower level of profits and cash flow, Cenkos expect closing year-end net debt of £2.6mn.

On the positive side, the UK government will soon be introducing legislation to fully legalise the use of privately owned e-scooters as part of a new transport bill announced in the Queen's speech. The UK is behind European counterparts such as Germany, France and Spain, so there is potential for sales of Tandem’s e-scooters to race ahead. For example, the change in France led to an eight-fold rise in e-scooter sales between 2017 and 2021, boosting the market there to €458mn (£393mn), or five times greater than in the UK.

The UK e-bike market is set to grow significantly in the coming years, too, as more consumers cotton onto to the benefits of electrically assisted bicycles. Although it has increased by more than two-thirds to 160,000 units since 2019, penetration levels lag well behind Germany where there are around 2mn e-bikes. Tandem is well placed to benefit, having a strong range of products at an attractive price point to offer UK consumers.

The potential for environmentally and energy efficient e-bikes and e-scooters suggests scope for earnings growth in future years. Moreover, even taking account of this year’s ravaged earnings projections, the shares are only rated on a price/earnings (PE) ratio of 11. The board are paying out the final dividend of 6.57p a share, too, taking the total to 10p, so there is a dividend yield of 4 per cent. Tandem’s ability to pay its bills is not in doubt as current assets are almost double current liabilities, the balance sheet strength is also highlighted in the 42 per cent share price discount to net asset value of 420p.

So, although my last buy call at 400p is underwater (‘A trio of Ben Graham value plays’, 28 March 2022), I am not cutting my losses. Hold.