Buy Park Group (PKG) at 27p

Says The AIM & PLUS Newsletter

In the July edition the small cap experts at the AIM & PLUS Newsletter recommended that subscribers invest in red hot penny share Park Group shares at 20.5p. Since then they have risen by 6.5p, giving investors who followed that advice paper gains of 32%. For details on how to subscribe to this award winning publication, edited by PLUS Journalist of the Year, Richard Gill, click here.

THE BUSINESS

Established in 1967, AIM-listed Park Group - today's free share tip - specialises in the sale of gift vouchers and incentive schemes for businesses and consumers. The company's products help firms provide one-off non-cash rewards to top-performing employees and also helps consumers plan and budget for major gift giving occasions such as Christmas. Previously listed on the Main Board, Park Group moved down onto AIM in October 2007 and currently operates through two segments:

Corporate Vouchers: Through the unit the business sells a variety of shopping vouchers, travel deals and gift cards to businesses which can be used to motivate staff or be utilised as marketing aids (prizes for completing surveys).

The division trades through two brands: Love2Reward and Parktravel, which offer a wide range of shopping and travel vouchers. Sales generated from the segment accounted for 41% of group revenues in the 2010 financial year.

Christmas Savings: Services provided through the division help families prepare and budget for Christmas shopping by enabling them to purchase vouchers, hampers and gift products on a 45-week prepaid installmentplan. By using its services customers can manage shopping during the busy festive season and avoid getting into credit card debt by budgeting ahead. The segment's leading product is the Love2shop high street gift voucher which is accepted by 85 major retails operating 20,000 stores across the UK. Turnover from the division represented the remaining 59% revenues during the 2010 financial year.

CURRENT TRADING

Park Group's results for the year to 31st March 2010 made for impressive reading considering that the reporting period spanned a recession that had a severe impact on sentiment on the high street. Group revenues grew by 5% to GBP 263.2 million in the period but a growing proportion of relatively higher margin Corporate Voucher sales meant that gross profits rose at a faster rate of 9.5% to GBP 16.4 million. Tight cost control meant that distribution and administrative expenses were essentially flat on the previous year triggering an impressive 38% increase in operating profits to GBP 4.3 million. However, earnings per share fell by 12.3% to 2.14p as the sharp reduction in interest rates during the economic crisis resulted in a 69% fall in income on its cash balances, to GBP 1 million. An unchanged full-year dividend of 1.32p was declared.

The group had a very strong balance sheet at the year-end with nil borrowings and net cash of GBP 15.5 million. In addition, the firm was strongly cash generative over the year with an inflow of GBP 8.5 million from operating activities.

The nature of Park Group's operations mean that there are some odd items on its balance sheet. One unusual line item on the balance sheet is 'Monies Held In Trust'. In addition to the business' own cash reserves, GBP 21.5 million is held on behalf of a trust which only releases funds as goods are distributed to customers who make use of its vouchers. These funds held with its trustees are recognised as cash inflows as services are provided over the year. Another unusual item is a GBP 30.2 million provision in its current liabilities. Since the firm receives money upfront for services that are only provided once a voucher is redeemed (this could take several months in the case of its Christmas operations) it makes a provision for amounts will be payable to retailers as vouchers are redeemed. This hefty provision meant that the firm held net current liabilities of GBP 35.1 million at the year-end.

More recently Park Group announced that it has received a payment of GBP1.9 million from HM Revenue & Customs to return tax overpaid between 1978 and 1996. The repayment relates to a reimbursement on 18 years of excess VAT payments due on the commissions paid by the group to agents selling its services. In addition, the business expects to be paid a further amount of approximately GBP2.5 million in respect of “statutory interest due” on the payments although professional costs of GBP0.35 million will have to be borne in connection with the claim.

OPPORTUNITIES & THREATS

One of the key threats to Park Group's trading comes in the shape of poor consumer confidence. Even though the UK economy has returned to growth spending on the high street is under threat from the planned increase in the rate of VAT from 17.5% to 20% and the general climate of unease caused by the need to axe spending in order to deal with the Uk's deficit. While this uncertainty is likely to dampen the public's willingness to shop we note that the business has previously noted steady demand during times of economic uncertainty. This is because its Christmas packages offer the ability for customers to budget for the festive season more carefully. In addition, its vouchers also offer an alternative to cash which enables companies to reward employees without increasing wages.

Another threat to future prospects is that the value of the group's service depends on the strength of its relationships with retailers and service providers. Therefore, events that affect the image of the voucher services or a decision by a store to disassociate itself from its brands would harm the overall attractiveness of its service to businesses and customers. In addition, the firm has highlighted that its performance depends on a good reception to its annual advertising campaign. Investors should also be aware that the firm's shares are very closely held with its top four shareholders holding over 80% of the company.

ASSESSMENT

Park Group is due to release a trading update at the time of its AGM in September and we would expect there to be some detail about recent trading and the use of the group's sizeable cash balances then. Last year's well-covered 1.32p dividend cost GBP2.9 million and so if the business successfully receives the GBP2.5 million in interest payments (which it anticipates getting) there is a very strong case for a special dividend to be paid.

Besides the historic dividend yield of 4.9% the shares are trading on a current multiple of 10.4 based on researcher Hardman & Co's 2011 forecast for 2.6p of adjusted earnings. This rating falls to around 6 if we exclude the cash held at the year-end. We believe that the current valuation fails to reflect the firm's growth prospects, the appeal of its Christmas and corporate vouchers in uncertain economic times and management's very good track record over the last three years. BUY.

Key Data
Epic: PKG
Market: AIM
Spread: 26p - 28p

The AIM & PLUS Newsletter, launched in 1995, covers shares listed on the Alternative Investment Market (AIM) and the PLUS Markets trading facility. Twice winner of the prestigious AIM Best Research Award, every month The AIM & PLUS Newsletter brings you two meticulously researched tips as well as investment ideas, analysis and expert comment on a wide range of companies from these vibrant markets, and is edited by current PLUS Journalist of the Year Richard Gill. To gain access click HERE.