Shares in £1.4 billion company Moonpig (MOON) have flown 21% higher to 423.8p since the online greeting cards retailer joined the stock market on 2 February at 350p. While its valuation is certainly not cheap, we’re inclined to believe the share price has further to rise.

Analysts think the company has been overly conservative with earnings guidance in order not to disappoint in its first year as a listed business.

Ongoing lockdown conditions mean people are far more likely to order a card online than bother going to one of the few shops open.

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This habit could stick once lockdown restrictions ease, particularly when people experience the ability to put someone’s name inside a card design, which is nice personalised touch, and not have the added hassle of buying stamps. Being able to do everything from your phone or computer is so much more convenient.

While online greeting cards retail is a competitive space, Moonpig is one of the best-known brands and widespread media coverage of its successful IPO (initial public offering) will work in its favour in terms of further raising brand awareness.

CLEVER MOVE

We note that Moonpig was only taking orders via its app rather than the website in the run up to Valentine’s Day, citing high demand. This may or may not be a savvy ploy to get people to download the app so that its brand is front of mind the next time they need to send a card or a gift.

Once the app is on a customer’s phone, push notifications act as a powerful way to increase order frequency and average order value through nudges and personalised recommendations. All very clever.

Moonpig’s management team, led by chief executive Nickyl Raithatha and finance director Andy MacKinnon and with former WH Smith (SMWH) chief executive Kate Swann in the chair, has sold Moonpig to investors as a technology play rather than as a plain vanilla retailer.

The company uses customer data and predictive technology to remind people of key events and suggest add-on gifts.

Getting people to buy more than just a card is key to the growth story because gifting is 10 times the size of the cards market. For example, for Valentine’s Day, Moongpig’s website was plastered with bundles such as a card with flowers or a big balloon. Visitors were also being incentivised to set up reminders for future card-giving dates with money- off deals.

NOT JUST ABOUT THE UK

The company trades as Moonpig in the UK and under the Greetz brand in the Netherlands, having made Holland’s market leader its first acquisition in 2019.

The web-based business boasts a powerful market position with a 60% share of the UK online greetings cards market. That is four times bigger than the number two player, Funky Pigeon which is owned by WH Smith.

Broker Peel Hunt describes Moonpig as ‘a very impressive, ground-breaking business’, with a strong position in an online market that is growing.

It says approximately 70% of cards are ultimately sent with a present (which is likely to have been bought from another retailer), yet only 16% of Moonpig’s transactions involve an add-on product and only a small proportion of customers come to Moonpig solely for a gift, so there is significant scope to grow this part of the business.

‘Moonpig may have a large share of the online card market, but its share of the cards sent in the UK and Holland can grow. At last count, it had 12 million active customers out of a potential pool of 53 million. Those customers use Moonpig for three of their 23 annual cards: that can rise too,’ it adds, arguing that the group’s customer relationship management and data crunching abilities are ‘game changers’.

HALLMARKS OF QUALITY

In the documents accompanying its stock market debut, Moonpig insisted it is a highly cash generative business due to its high margins, negative working capital profile and relatively low capital expenditure requirements.

For the six months to October 2020, revenue grew 135% to £155.9 million, with £120.8 million contributed by the core Moonpig business and the balance by Greetz, where margins have expanded under Moonpig’s ownership.

Peel Hunt’s retail experts believe the Moonpig model can be exported internationally too. The shift towards gifting solutions should help the company to grow on the continent, where Europeans tend to send less cards than the Brits. Moonpig already has a small operation in the US too and Peel Hunt says it would not be surprised if this became more material in time, either organically or via acquisitions.

For the financial year to April 2021, with a tailwind from the pandemic, the broker forecasts 75% jump in adjusted pre-tax profit to £55.5 million on £300.1 million of sales. These estimates could prove conservative if, as is likely with brick and mortar stores shut, Moonpig enjoys bumper business around the major card-sending events of Valentine’s Day and Mother’s Day.

Pre-tax profits of £38.1 million are on the cards for 2022 on £284.5 million of revenues as the boost from lockdowns normalises. Peel Hunt forecasts a surge back to £53.6 million on £316.4 million of sales in 2023.

Based on the broker’s 2023 earnings estimate of 12.6p, Moonpig’s shares trade on 33.6 times earnings. That is similar to what ASOS (ASC:AIM) trades on for the next 12 months’  expected earnings.

‘(Moonpig’s) growth rate, the “category killer” nature, the opportunity to move into the gifting market, and the extremely compelling data on customer retention, make this a highly prized asset, and we would be surprised if the valuation did not ultimately reflect that,’ concludes Peel Hunt.

SHARES SAYS: Though the high valuation means the company is priced for perfection, Moonpig has a clear growth path as part of a structural shift in its part of the retail sector. Buy at 423.8p.

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