musicMagpie PLC has what looks like a fantastic business proposition … were this still 1990.
The company, which styles itself as a “re-commerce business” (it sells second-hand technological gizmos, CDs, DVDs and games), listed on AIM in April of last year and has taken less than a year as a publicly listed company to seriously disappoint the market.
The shares, which floated at 193p, lost a third of their value on Wednesday, slumping to 110p after the company posted a loss of £14.82mln in respect of the year to the end of November 2021, compared to a profit the year before of £6.96mln.
Share-based payments of £17.38mln put a serious dent in the profits and the company understandably preferred to emphasise adjusted underlying earnings (EBITDA), which exclude those share-based payments; adjusted EBITDA nevertheless still fell, to £12.17mln from £13.87mln the previous year on revenue that fell to £145.5mln from £153.4mln.
On the face of it, the company’s business model is admirable. It enables customers to sell their old mobile phones, unwanted CDs, computer games and for all I know 8-track cartridge machines for a few quid and then sells them on to other customers looking for a bargain who don’t mind second-hand kit.
All very commendable from a recycling viewpoint and given the company enjoyed a record sales day on Black Friday both in the UK and the US it is clear that there are people who are big fans of the service.
People who, presumably, have never come across a charity shop or car boot sales, heard of Amazon marketplace or eBay, or met Dave, that dodgy geezer down the pub.
The group said it had seen its rental subscription service continue to grow in the three months to the end of February (the first quarter of the company’s fiscal year) but “in line with current consumer trends”, it has seen a moderation of outright sales and trade-in volumes in Consumer Tech.
Whether this is a harbinger of worse times to come, what with inflation on the rise, the national insurance increase imminent and interest rate rises on the horizon, is the big question.
Judging by today’s share price reaction, the market has decided tougher times are ahead but the company’s nominated adviser, Peel Hunt, is still saying the shares are a buy while simultaneously slashing its earnings estimates.
“Revenue is still mostly one-off purchases; while 1Q22A revenue was in line with expectations, the current climate saw gross margins squeezed, with a shift towards higher-priced/lower-volume devices. We cautiously assume this for the rest of FY22E and into FY23E, significantly reducing our EBITDA estimates (c.30%) but excitingly, lower entry-price rentals are proving popular, ideal for the current climate (lower entry prices) and a long-term margin booster,” the broker said.
The broker is forecasting profit before tax this year will be £3.3mln, down from its previous forecast of £10.2mln.
“Updating our DCF [discounted cash flow model], we reduce our target price from 233p to 190p, but reiterate our Buy,” the broker said.
musicMagpie is no stranger to sharp reductions in prices. It believes the positioning of its “£circular economy model” in the value-led sector leaves it well-positioned as economic uncertainty.
There is surely a danger, however, that the stock will join compact discs and books in what it refers to as “the sunset category”.