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Investors’ Chronicle: Paragon, Mind Gym, Moonpig

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BUY: Paragon (PAG)

The specialist lender posted a strong set of results as interest rates and improving margins lift earnings, writes Julian Hofmann.

The niche banking market proved fruitful for Paragon, as the specialist lender ended its year strongly with net interest margins responding to the rise in overall interest rates, and its business mix of buy-to-let loans and commercial lending to small and to medium-sized businesses performing better than expected.

Rising interest rates were a boon for the bank’s hedging position, which saw fair value gains on derivative contracts of £192mn, which was behind the big rise in reported profits. These are likely to reverse over time, but investors will take confidence from improving margins as the economy goes into recession.

This 2.69 per cent net interest margin, up 30 basis points, was the result of a combination of rising interest rates and an expanded loan book which underpinned the gap between income and the bank’s cost of capital. Overall, the loan book increased by 6 per cent to £14.2bn, with commercial lending taking the lead on the back of higher value business generating net interest income of £113mn, an over 18 per cent rise on 2021. The performance justified the bank’s move into SME lending a few years ago and there were signs in these results that this segment of the business is starting to mature.

Credit quality remained sound with loan arrears declining to 15 basis points from 21 basis points this time last year, with Paragon reporting a £14mn impairment charge, against the £4.7mn release last time. Chief executive Nigel Terrington said: “We have taken some impairments based not on the current performance of the lending book, which is excellent, but on where we think the economy might be headed next year. We might see some weakness in house prices which will soften demand for loans, but we have made provision for that.” Paragon also announced a £50mn share buyback alongside the results.

Paragon’s attraction for investors is the higher returns the company achieves on its relatively stable cost base. A cost to income ratio of 39.4 per cent in these results is the envy of the larger clearing banks, while return-on-equity of 16 per cent is at the top end of the sector. Despite flagging lending weakness next year, broker Numis still forecasts earnings per share of 64.2p, giving Paragon a forward rating of 7.2. That is still only average for the sector despite Paragon showing far better performance than its larger high street competitors and shows the value of specialisation in the banking sector.

HOLD: Mind Gym (MIND)

Its European and US markets are reopened, but economic clouds mean corporate training specialist may miss its window, writes Alex Hamer.

The brief window between the pandemic and the new belt-tightening approach of business was good for Mind Gym, the training and business transformation specialist. An improved US market drove a sales and cash profit uplift in the six months to September 30 — the latter climbing from just £700,000 a year ago to £1.9mn. 

A bright spot was a contract worth £10mn over the next two years signed with a “global energy company”. Chief executive Octavius Black framed this as a “culture change and leadership development” job with some potential additions. Perhaps a check on executive hubris in this record time for oil and gas profits.

But now Mind Gym has warned on the US outlook, although it has held on to full-year guidance. Its key costs remain staff pay and investment into online coaching and training products — administrative expenses climbed 10 per cent to £22.7mn in the half year.

The proportion of intangibles on the balance sheet has come up as well, after Mind Gym spent £2mn on developing new digital productions in the first half — total intangibles are up to £9.8mn from £5.2mn a year ago.

The outlook for the company is mixed: in times of mass redundancies, executive teams may need more help both with basic workplace function and strategy, although its own profitability could fall. Liberum analyst Ciarán Donnelly forecasts both higher sales and higher capital costs over the coming years (£78mn and £10mn in 2025, respectively), although he doesn’t see earnings per share returning to the 6.8p a share level seen in 2019. We would err on the optimistic side in terms of Mind Gym’s order book but don’t see significant growth or profit margins in its near future.

HOLD: Moonpig (MOON)

External factors have led the greeting cards retailer to downgrade revenue guidance, writes Jennifer Johnson.

Online gift and cards retailer Moonpig has found itself caught between the UK’s cost of living crisis and widespread industrial action. Customers have been “trading down to lower gifting price points” as inflation hits discretionary spending. Meanwhile, the strikes at Royal Mail have made it more difficult to get cards through letterboxes at all.

For Moonpig, the result is a downgraded revenue forecast for its full financial year. Analysts at Peel Hunt report that management is not “flustered” by the slower pace of sales, “but it is realistic to know that lower consumer confidence and the Royal Mail strikes will have a short-term impact on sales at a crucial time”.

Total orders dropped by 13.3 per cent in the six months to the end of October, which the company said was partly due to industrial action. The fact that Covid lockdowns inflated the previous year’s figures made comparisons difficult and also contributed to falling orders.

The company is, however, standing by previously issued cash profits guidance, thanks to year-on-year gross margin growth of five percentage points to 54.1 per cent. Management has also vowed to take a “disciplined” approach to cost management in light of the current trading environment.

Shareholders will be dismayed to note that the shares fell by more than 14 per cent in the first few hours of trading on the day of these half-year results. But prospective buyers should assess whether external factors have pushed the stock down to the bottom of a valuation trough.

Given that the cost of living crisis looks unlikely to be resolved quickly, and strikes at Royal Mail are planned for the critical Christmas period, Moonpig shares could struggle.

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