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MusicMagpie
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== Investment summary == === Company description: Leading online re-commerce === musicMagpie (MMAG) is a leading online consumer re-commerce company with a current focus on buying and selling across three categories: consumer technology, media (ie disc media) and books. Its growth prospects are mainly driven by increasing consumer acceptance of circular economy models, a result of increasing environmental and sustainability concerns. The main geographic presence is the UK (79% of revenue in FY21), one of the more developed consumer re-commerce markets. It is the world’s largest seller on Amazon and eBay by reference to volume of sales transacted on third-party platforms. It also has a less developed business in the United States. Over time, the product category focus has evolved and MMAG’s technology will enable this to continue as consumer engagement with re-commerce increases. Historically, MMAG’s relationship has been solely with consumers, and typically intermittent in nature. Recent initiatives indicate this is changing: the new offer of rentals of smartphones and other consumer technology aims to build recurring and more profitable revenue streams; new and enhanced digital marketing capabilities seek to stimulate new cross-selling opportunities; and the first move into corporate recycling opens up a new significant pool of potential product supply and revenue. Management guides to long-term double-digit revenue growth for Technology, countered by continued high-single-digit declines for Media, suggesting the current business mix is capable of mid-single-digit revenue growth, which may accelerate as Technology’s importance to the group increases. === Financials === MMAG demonstrated strong revenue growth, with a CAGR of 8% in FY18–21, ahead of market growth estimates, due to growth in consumer numbers and repeat customers. This points to growing engagement with the circular economy and market share gains, and a further boost to demand during the COVID-19 pandemic. At the same time, refinement of the buying and selling processes led to significant gross margin enhancement (from c 23% in FY18 to c 30% in FY21). Edison forecasts 6–8% pa revenue growth in FY22–24 despite further normalisation to pre-COVID-19 levels for Media and Books. Edison forecasts that FY22 EBITDA will decline as the transition to building rental income - which is more profitable in the medium-term - dampens near-term growth, and reflecting recent trends in Technology outright gross margin, before growth resumes in FY23. === Valuation: Fair value of 168p per share === Its primary method of valuing MMAG is a discounted cash flow (DCF) analysis, with a fair value of 168p per share. Beyond its explicit forecast period Edison assumes 5% annual revenue growth for ‘outright’ sales, fading down to c 4% growth by its terminal year, FY31, and rentals to increase revenue growth by 2–5% pa. The higher-margin subscriptions potentially increase the EBITDA margin from 8.4% in FY21 to c 21% by FY31. Edison uses a WACC of 10% (risk free rate of 3%, risk premium of 6%, Beta of 1.2 (limited trading history), and little debt) and a 2% terminal growth rate. === Sensitivities === MMAG operates in markets with a wide range of competitors and the structural growth dynamics of the circular economy suggest that competitive pressures are likely to remain high. It is exposed to frequently changing product cycles and some product categories that are expected to demonstrate structural declines, such as disc media. As the circular economy evolves, MMAG’s business exposure is likely to change as it seeks to increases the size of its addressable markets and the number of product categories offered. MMAG’s US business is a relatively small business in a less well-developed re-commerce market, therefore this may be more difficult and expensive to develop than expected.
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