When Rowan Gormley reversed Naked Wines into Majestic Wine in 2015, his online subscription business was making £74 million in annual sales to 300,000 customers but had just clocked up £3.3 million in pre-tax losses.
Naked Wines was founded in 2008 and operates a crowdfunding model where subscribers receive exclusive wines at preferential prices. The idea behind the combination, at a cost to Majestic Wine of £70 million, was that it would bring together a premium online wine-selling service and a network of mid-price high street retailing warehouses.
As well as raising the prospect of introducing services such as click and collect at Majestic stores for Naked Wines customers, crucially the deal also gave Mr Gormley, 57, a balance sheet that he could use — as the combined company’s new chief executive — to invest.
Majestic Wine opened its first store in 1980. At the time of the acquisition, the retailer had 212 outlets and 678,000 customers and was poised to announce annual profits of £18.4 million.
Just over four years down the track, assuming shareholders grant their approval, the two businesses are preparing to part company, with Mr Gormley auctioning off Majestic Wines’ retail warehouses and commercial operations to Fortress, the investment group, for a total of about £100 million.
The combined group, which also has a fine wines arm called Lay and Wheeler, delivered a resilient 6.3 per cent increase in revenues to £506.1 million for the year to the start of April but an £8.3 million pre-tax profit for the previous year became an £8.5 million pre-tax loss after it took an £11.1 million impairment hit on the stores and after investment in growth at Naked.
Mr Gormley may well be right that “the future is Naked” and the cash that is raised means he can plough even more investment into the faster growing division.
Naked reported underlying sales growth of 14.5 per cent last year and, in the period following the takeover, has almost doubled in size with 500,000 customers, producing 1,000 wines through independent vineyard owners in 17 countries.
Majestic Wine’s portfolio has stayed largely static at about 200 stores. Underlying sales growth last year came in at 1.5 per cent, the same level of growth recorded in the year of the acquisition.
It hasn’t been the easiest of periods for shareholders in Majestic Wine, now renamed Naked Wines. When the deal was first announced, the company immediately withheld the final dividend, 4.2p in the first half. While it was reinstated earlier than expected, investors nevertheless had to wait 18 months for the privilege.
Mr Gormley then initiated a large investment programme, moving to reinvigorate the bricks and mortar stores as well as Naked. Last year he increased a £12 million investment in trying to win new customers by a further £9 million and has invested more than £70 million in Naked’s operations since the deal.
While the net result of combining the retailers has almost doubled revenues over the four years, margins remain heavily under pressure and, although it is forecast to eventually make £4 back for every £1 invested in a customer, that has yet to translate into higher profits.
It must also feel painful for investors that the shares, at 323¼p on the day of the acquisition, were yesterday changing hands for 263p, down 3p or 1.1 per cent on the day.
The shares, which are extremely volatile, are valued at about 14.5 times Liberum’s forecast earnings and carry a yield of 2.5 per cent. Mr Gormley is undeniably a smart operator but the stock is not enticing.
ADVICE Avoid
WHY Interesting model but eats up investment capital and the shares have struggled to gain ground
Unite Group
It’s that time of the year when anxious children at schools and colleges, and usually their parents too, have been on tenterhooks for the results of their GCSEs or A levels, in the hope that they will have done well enough to move on to the next educational stage.
If they do secure a university place, particularly at a high-performing university in, say, London, Edinburgh or Manchester, they will be likely to stay in student digs owned and operated by Unite Group. Founded in 1991, it is the biggest single provider of student accommodation in the UK. The company listed on the junior Aim market in 1999 and, gravitating to the main market a year later, is a constituent of the FTSE 250. It is structured as a real estate investment trust, meaning it receives a light-touch tax treatment in exchange for paying out the vast majority of its rental income as dividends.
As it operates at the premium end of the market, Unite’s student tenants tend to pay a premium rent in exchange for facilities ranging from wifi and free coffee to use of gyms.
Unite controlled 51,000 beds in 22 cities and its property portfolio was valued at £3.1 billion as at the end of June. Its reach will extend much further after its £1.4 billion acquisition of Liberty Living announced last month. Assuming the competition watchdog doesn’t block it, or force it into sales, the enlarged group will manage 73,000 beds in 173 properties in 27 locations with a portfolio value of £5.2 billion. It has raised just under £260 million through a share placing to part-pay for the acquisition. The rest will be covered by an equity issue to Liberty’s owner, the sale of assets in Cardiff and existing credit facilities and cash.
This company is a classy operator in a steadily growing market, despite a post-Brexit vote drop in applications from EU students.
The last time this column looked at Unite, in July last year, it recommended holding the shares at 854p. They have since risen by just over a fifth despite losing 8p to £10.39 yesterday. The shares trade on 26.5 times Numis’s forecast earnings for a yield of 3.2 per cent and merit an upgrade to a buy.
ADVICE Buy
WHY Growing, highly efficient business whose acquisition plan brings further potential
