Stockwatch: is Angling Direct having a watershed moment?

Fishing tackle provider has seen sales soar, but doubts remain over whether this angling trend is a fling or a long-term romance.

Last Tuesday’s rather bullish update from the UK’s leading supplier of fishing tackle has this week boosted its AIM-listed shares Angling Direct (LSE:ANG) from 49p to 62p, currently 60p.

This represents a capitalisation of £46 million versus market expectations for about £65 million annual revenue going forward, i.e. a modest 0.7x sales. 

Yes, the table shows very modest margins, these having evaporated from 2018. But if a new chief executive has their act together then growth in online sales could lead to better margins, like other online businesses once they achieved a good reach. 

Also, my recollection is that some legacy stock issues from buying stores compromised margins, which may now be sorted. If an apparent rise in angling activity during Covid-19 is sustained amid reduced social sports and staycationing then this stock could have a better future.

Currently with 36 shops and a central distribution facility in Norfolk, Angling Direct listed three years ago at 64p – with a classic prospectus to rationalise a fragmented industry of smaller outlets, and nowadays to grow online sales. 

Its price had reached 115p around six months later, also rather classic honeymoon behaviour, but it drifted to about 70p on one issue or another. Flooding in early 2020 then compromised angling, and the Covid-19 lockdown saw the stock briefly dip below 30p in late March.

I have been interested in the stock’s potential but rated it ‘avoid’ given a mixed history since flotation, where low margins offer no leeway for mistakes. There ought however to be scope to rationalise the many small independent tackle outlets and grow online sales.  

Is this a watershed moment for angling?

The update covering the six months period to 31 July cites 21% overall revenue growth despite the retail stores being closed from 24 March to 14 June. Interestingly, visitors to Angling Direct’s UK website rose 54% to 3.7 million. 

Key questions are whether there was substantial pent-up demand coinciding with summer and people resorting to angling while other group activities are compromised. Or, more positively for the sport, people are seeking better life balance, possibly with more part-time working, leading to more time for angling as a leisure activity. 

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Sales across all channels have soared 95% like-for-like during the six weeks to end-July. The sceptic inside me wonders what extent this reflects the UK government’s furlough scheme – the chancellor rather boasted in March that this was “the most generous in the world”. Has it created an artificial environment where people have been able to indulge leisure activities or DIY, on 80% pay? This has to correct in due course, given the UK cannot afford to extend its furlough scheme to 24 months like Germany is doing. Disposable income does appear to have had a boost as some people have become hermetic rather than go out and spend money in pubs, restaurants and leisure venues. 

Like-for-like growth in the last financial year 

Boosted by acquiring ten stores, total revenue for the year to 31 January 2020 rose 26.5% to £53.1 million. Store sales were up 41.3% to £27.9 million, or 12% like-for-like. 

But margins were hit by legacy stock in these acquisitions, while New Year floods hit sales of higher-margin consumables, hence a £1.5 annual million pre-tax loss. Online sales rose 14% to £25.3 million, within which international (continental Europe) rose 8% to £5 million. 

End-January net cash was down from £13.5 million to £6 million, this justified from the cash flow statement showing £2.5 million spent buying businesses and a similar amount on property, plant and equipment. Fair enough - in the sense that the 2017 flotation had raised £9 million for expansion, with £7.4 million earmarked for new stores.  

However the uncertainties presented by Covid-19 meant that soon after last June’s prelims a share placing at 50p was arranged, raising £5.5 million at the cost of 14.5% dilution.

A £2.5 million short-term credit facility (currently undrawn) added further scope. Cash capability was needed to ensure prompt payment to suppliers, with high customer demand anticipated as restrictions eased. 

This was a correct marketing judgment given the latest update cites 75% like-for-like sales growth for stores during the six weeks to end-July.

Remarkable leap in end-July net cash to £21 million

The company put this down to “strength of trading, associated cash conversion and working capital timing”, which is some radical change versus said prudent need for circa £5 million cash barely seven weeks before.

Subtracting that still implies a £10 million rise from £6 million at end-January, which management says was due to the company’s web distribution centre being able to “draw on existing stock levels as well as stock held in closed retail stores”.

Yes, working capital increased to £18 million in the 2018/19 year and around £13 million in the last year, but it is still a big jump to wholly explain this way. 

Also, and with due respect, the company does need to ensure it can sustain a regular supply of a wide range of tackle. 

Otherwise the six-year table shows a poor record in free cash flow, with cash absorbed by operations in all but the 2015/16 year and sizeable capital expenditure accentuating this.

EU sales also strong: but for how long into 2021?

First-half year sales to Germany rose 33%, France by 62% and the Netherlands by 81%. These are helped by comparatively low bases, as well as the continuity of the UK’s transition period since leaving the European Union. But, as I have frequently mentioned with regard to online businesses, managers give no hint even of how they are preparing for various scenarios going into 2021. 

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All other exporting businesses in goods and services are wary as to whether an EU trade deal will follow or the UK has to revert at least temporarily to World Trade Organisation rules.

EU tariffs are principally on agricultural products, otherwise the average tariff is just 2.8%. So perhaps the real risk is very low. However, if negotiations end in discord it is hard to see a loophole existing for ‘business as usual’ online.

‘Good’ but un-quantified progress on margins

Perhaps it is over-exacting to expect such percentages in an update, but given the context they need to be material.

The Angling Direct story is bolstered by “increasing own-brand sales, improving working capital and other efficiencies from the supply chain and stores network,” according to the company.

It is possible the new chief executive – who has had chief operating officer roles at Dunelm and Holland & Barrett, and a number of executive roles during 12 years at Halfords – is getting to grips with the company. 

Part of the bull case here is a that a seasoned professional has taken over from the stereotype of an entrepreneurial founder who runs into trouble post-flotation. 

Much therefore remains speculative: above all whether angling can enjoy a halcyon period into the future.

The outlook statement reckons the business is “very well-placed to benefit from staycations over the summer months”. I concur, in the sense enough people will be wary of accepting any Covid-19 vaccine, behavioural changes may stick and we already see many UK holiday homes booked for summer 2021. 

Management concedes “the extent to which some of the exceptional trends will continue longer-term is not yet clear,” and assuming no further Covid-19 restrictions they expect sales “to begin reverting to more normal trading patterns during the remainder of the year”.

Tangible net asset value around 31p a share 

Or at least, that is my estimation, and this is admittedly not great if worthwhile profits do not materialise. The risk/reward profile remains undefined here, but assuming the new boss can hone improvements in a scenario where angling’s popularity grows then a market cap nearer £100 million is possible, hence scope for the stock to at least double. If you are comfortable with the risks: ‘buy’.    

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.