Angling Direct – why these shares are a catch

Investment case

• Angling Direct (ANG) shares trade at an extremely low valuation ex-cash attracting strategic investors
• Strong balance sheet with significant cash pile underpins expansion plans via store rollout and own brand development
• Low operating margins offer significant room for expansion as economies of scale kick in
• Improved profitability and progress in the more difficult European market could see the shares rerate as investors view the company as more than a high volume, commodity retailer

At risk of oversimplification, it could be said that that equity investors can be broadly divided into two distinct groups – those seeking large returns as quickly as possible and those taking a more patient approach to accumulating wealth. 

These two investor characteristics can also be simply differentiated as growth versus value. Indeed, although growth and value are not mutually exclusive, value investors largely seek to make their gains by identifying undervalued assets and waiting for the broader market to recognise that mispricing – and taking advantage of the fact that a large component of future returns often depends on low starting point valuations. 

Waiting can take time, though – as legendary economist John Maynard Keynes once put it, "markets can stay irrational longer than you can stay solvent". But if you can afford to wait, value investing can be incredibly rewarding. 

In that sense, value investing is rather like fishing – anglers often have to wait patiently for that rewarding moment when they hook their catch, while value investors must often wait patiently for other investors to recognise the bargain they’ve spotted. And often, both go home with nothing. 

The business

That, though, may not be the case for investors who have waited patiently for a recovery in the share price of the UK stock market’s only fishing related stock, Angling Direct (ANG), the UK’s leading omnichannel tackle retailer whose cash pile so big that its lowly valuation seems unlikely to escape the attention of investors for much longer. 

Already, Kelso Group, an investor in undervalued London-listed companies, has taken a stake in the retailer, suggesting that with £15.8m in cash, equating to about 60% of its equity market capitalisation, there is significant shareholder value to be unlocked. That figure doesn’t include £9.8m of lease liabilities, but even stripped of those net cash stands at a very healthy £4.2m

Cash aside, there are other key attributes to Angling Direct that Kelso has spotted that other less patient investors may have missed – market share and potential growth for one thing. With a footprint of 47 stores and forecast January 2024 sales of £81.7m, Angling Direct is the UK’s biggest specialist fishing retailer with 14% share of a fragmented market, around 8 times larger than its nearest competitor. The company has grown from 15 stores at IPO in 2017 over which time it’s quadrupled its revenue and increased its EBITDA from £0.9m to an estimated £5.5m. 

Alongside its store estate, the company has built a successful online channel accounting for around two-fifths of revenue, as well as building up a small presence in the European market, accounting for less than 5% of group sales predominately via online channels with one store recently opening in the Netherlands. 

That physical expansion – albeit a baby step - suggests that, at present, the company’s management remain committed to European expansion. And in terms of the addressable market there it’s easy to see why – at an estimated £1.8bn it’s more than three times the size of the UK’s fishing tackle market. 

However, despite the size of the prize it’s a market that’s much more price competitive, and despite success in growing customers profitable growth is proving much harder to come by. Kelso has suggested – fairly – that management closely review progress before committing to further capital investment. Given the judicious management of its UK roll out one can only imagine they will. 

In the meantime, there is still much to come from the UK – sales grew 9% in FY2024, with like-for-like store growth up 3.1% - boosted to 7.6% by new openings - and online sales up 11.1%. That suggests it’s on track to hit its target of taking 20% of the market, which alone means significant profit growth to come as scale benefits come through as they have historically. And with so much cash on the balance sheet and the business itself highly cash generative – operating cashflow all but trebled to £6.4m in FY24, of which £1.7m was left over as free cash even after hefty capital expenditure - there’s no shortage of funds to invest in growing the UK further.

Finances

Another reason for the shares lowly valuation could be concerns over the quality of the business, in particular its low margin nature – gross margins hit 34.9% over FY24, up marginally from a year earlier, while EBITDA margins (post-IFRS 16) stood at 6.5%. Admittedly, the drag from Europe’s EBITDA losses partly explains this – it lost just under £1m there in FY2024 – but retail and especially online retail is a characteristically low margin business; the UK’s online EBITDA margin stood at 10.9% in FY2024, compared to retail’s 11.9% margin. That’s well below many other retailers – for now. Next, for example, boasts EBITDA margins of 22.6%, while pureplay online retailer Victorian Plumbing’s margin stands at 8.3%. In short, current low margins should be seen as an opportunity.  

Scale will certainly help, not least as head office costs can be leveraged across a larger estate – although £0.7m higher at £5.1m in FY2024, that represented a 20-basis point fall as a proportion of revenues. Overall administrative expenses grew 9.1% to £23.7m, against a 10.2% increase in revenues, with European admin expenses flat, while distribution costs also climbed at a slower rate than sales. As the company puts it, it’s “leveraging the cost base while climbing the growth curve”.

Outlook

Some of the success enjoyed by the company in 2024 can be put down to initiatives to grow the number of customer’s it’s engaging with, not least the launch of its new MyAD loyalty card which signed up over 220,000 customers in its first year. This unique service is key to the company’s plans to act as a consolidator in a fragmented market, hoovering up rivals’ business by offering targeted promotions, differentiated pricing, and other benefits and content. 

As well as taking advantage of the significant growth opportunities offered by gaining market share, the group is enjoying a strong tailwind from the rising popularity of angling and tapping into the sport’s popularity through it’s “Getting Everyone Fishing” messaging. According to government figures there are already 3m recreational anglers in the UK, with 1m in England and Wales where Angling Direct currently operates, but the Environment Agency is targeting further growth of participation. That’s expected to drive the UK fishing tackle market from a pre-Covid figure of £151m in 2019 to £229m in 2028.

Europe’s angling market is larger still, with more than 5m anglers active across the company’s key markets of Germany, France, and the Netherlands, the site of its first bricks and mortar outlet on the continent. And although Angling Direct’s business there is nascent, it is already approaching break-even point as scale builds - European growth rates are rapid, albeit from a small base, with sales there up 36.3% last year. The focus on operational efficiency and the benefits of its new Dutch distribution centre opened in late-2022 means sales are rising faster than costs – and bring tax benefits given its location.

And although shareholder Kelso is agitating for a return of cash in some form - buybacks for example - retaining firepower to take advantage of M&A opportunities in both the UK and potentially Europe makes sense. In fact, acquiring existing stores to broaden its reach into new or underrepresented catchments is a stated aspect of the group’s strategy, and there are still notable holes in the UK’s store portfolio, not least in Scotland. That said, the company’s rising free cash flow means that cash pile may become surplus to requirements as the company is increasingly able to self-fund organic expansion. 

The company also has plans to invest in its own brand ranges Advanta and the newly launched entry level brand Discover. Together these currently account for 8.8% of gross profit, up from 8.3% in FY2023, but their gross profit growth of 16% is outpacing the wider group gross profit growth of 10.7%, highlighting the potential of own brand growth to further accelerate overall profit growth.

Management & Shareholders

Angling Direct certainly has the board strength to deliver this expansion, and importantly has continuity in its management team. In June, former CFO Steve Crowe stepped up into the CEO role as former CEO Andy Torrance became non-executive Chairman, replacing founder Martyn Page who remains a non-executive director. 

Mr Page – a well-known figure in the sport of angling - also remains the largest individual shareholder, with a stake of around 14% of the company, while the top four shareholders together own around two-thirds of the shares. In one sense this offers stability, but it does also present liquidity issues – indeed, the shares were untouched by recent strong results.

Valuation

Despite the progress the company has made delivering its strategy since IPO – tripling its bricks and mortar footprint with the addition of 32 new stores, the continued development of its ecommerce operation and own brand offer, and the opening of a European distribution centre – its shares trade at around half of their IPO price.

One could argue that investors are simply responding to tougher conditions over 2023 and 2024 which saw profits fall back from the steady upward trajectory that had previously demonstrated. But earnings remain positive, despite two years during which the company has had to weather storms both literal and metaphorical – in the first case, terrible weather that kept even the most-hardy anglers indoors, and the latter inflationary pressures that have hit consumer discretionary income and presented the company serious cost management challenges. 

Valuation is somewhat complicated by the cash pile and the calculation of net debt – if exclude lease liabilities from the net debt calculation, then the shares look very cheap on an EV/EBITDA ratio of less than 2, an EV/Sales ratio of 0.1, and an adjusted PE of less than 10. But even if we treat them as debt the shares look much cheaper than headline figures suggest, on respective EV/EBITDA and EV/Sales ratios of 4.6x and 0.3x.

That puts it at the lower end of valuations across the UK retail sector, for a company that unlike many other retailers remains firmly in growth mode with scale efficiencies still to be unlocked that should see reported earnings far exceed the 3p generated in 2022. In May this year, the record for the UK largest freshwater fish caught by rod was beaten at a lake in Maldon in Essex, a 143lb catfish that took the angler 50 minutes to land – equally patient stock market investors may land themselves a similar sized catch in Angling Direct’s shares.  

Ticker: ANG

Sector: General retailers

Mid-price: 39.5p

Spread: 39-40.5p

12-month high/low: 45p / 25p

Market cap: £30.5m

The writer owns shares in Angling Direct