N Brown profit surge drowned out by legal worries

Branded fashion and homeware retailer N Brown (BWNG) has not enjoyed the pandemic boom experienced by other digital businesses. The full-year results in May disclosed the loss of half a million active customers and 2m fewer customer orders. While there are signs of some green shoots of progress in the half-year results to 28 August, a legal case around PPI has cast a pall over the business.

Allianz Insurance was the underwriter of historic PPI sold to customers by JD Williams, an N Brown subsidiary. The insurer issued claims against the group for redress payments made to customers and increased the value of its original claim to £30m plus interest. In June, Allianz estimated the value of a further element of the claim at up to £36m – these are significant amounts given the group’s bottom line. Analysts at Shore Capital “expect cash outflows from the outcome”. Management thinks any cash flows will likely be realised in FY2023.

While revenue was flat overall, the group’s strategic brands recorded encouraging growth of 15 per cent. Statutory profit before tax doubled, helped by a £34m drop in impairment losses on customer receivables. Adjusted gross profit margin grew by 7 percentage points to 51 per cent, while adjusted Ebitda was up 10 per cent to £53m with profitability improvement in its financial services credit offering.

Consensus estimates compiled by FactSet expect earnings per share (EPS) to fall to 7p from 7.9p for the full year. While Shore Capital’s forecast FY2022 forward price/earnings (PE) ratio of 6.8 times is attractive, the potentially hefty outflows from the Allianz legal case dampens our enthusiasm for now. Sell.

Last IC view: Sell, 24p, 20 May 2020