Should you keep buying The Works IPO after share price climbs 10%?

Roland Head reviews the latest figures from recent IPO Works co uk plc (LON:WRKS).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I want to start by looking at a company that only floated on the London market in July. Value retailer Works co uk (LSE: WRKS), also known as The Works, sells a wide mix of arts, crafts, books, toys and stationery supplies. The firm operates from 479 high street stores, as well as online.

Works’ share price is up by 12% at the time of writing today, after an upbeat trading update reversed some of October’s losses. Do I think this the right time to invest in this potential growth story?

Inside ownership

One attraction is that The Works is chaired by Dean Hoyle, who founded the Card Factory chain of shops. Mr Hoyle grew Card Factory from a market stall to a company with annual profits of £50m in just 12 years.

Mr Hoyle sold some of his shares in The Works in the company’s IPO, but still has a 14.2% shareholding I estimate to be worth about £12m. This should mean his interests are well aligned with those of smaller shareholders.

Several of the firm’s senior managers also have stakes of around 1%, giving them a significant interest in the business.

Are the shares a buy?

The firm’s accounts suggest that this business isn’t quite as profitable as Card Factory. Sales of £192m in 2017/18 generated an operating profit of just £6.2m. That’s equivalent to an operating margin of just 3.2%, well below the greetings card retailer’s figure of 18%.

The Works is also operating with a significant amount of debt. Net debt was £24m at the end of April. That’s twice the group’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).

In addition to this, the company is committed to future lease payments of £135m on its store estate.

Analysts expect the firm to report adjusted earnings of 9.1p per share this year, rising by 30% to 11.8p per share in 2019/20. These forecasts put the stock on a price/earnings ratio of 16 for the current year, falling to a P/E of 12.3 next year.

Dividend payments are also expected, with a forecast yield of 2.5% this year and 3.2% next year.

The Works expects to open 50 new stores in 2018/19, and a similar number the following year. If this expansion can be achieved without any loss of profitability, then I think the shares could be a decent buy at current levels.

My concern is that the firm’s slim margins and big store estate leave it vulnerable to rising costs and the high street slowdown. For these reasons, I won’t be investing at this time.

One creative company I do own

Some of The Works’ customers are probably also customers of Harry Potter publisher Bloomsbury Publishing (LSE: BMY).

The schoolboy wizard isn’t Bloomsbury’s only success. The firm also sells academic books and non-fiction ‘coffee table’ titles, for example. Sales have risen from £109m to £161m since 2014, while profits have risen from £7.7m to £9.1m over the same period.

The group’s profit margins are slightly lower than they were, but cash generation remains strong and the group reported a net cash balance of £17m at the end of August.

Since peaking at more than 250p in June, Bloomsbury’s share price has fallen by more than 20% to about 195p. This puts the stock on forecast P/E ratio of 13.4, with a dividend yield of 4.1%

I hold the shares myself and would consider buying more at this level.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Bloomsbury Publishing. The Motley Fool UK owns shares of Card Factory. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 reasons why I’m loading up on FTSE 100 shares

This Fool thinks FTSE 100 shares look cheap. With that, he plans to continue snapping them up today. Here's one…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Why wait? I’d buy FTSE 100 shares now before the next stock market rally!

Our writer explains why he'd snap up what he sees as bargain FTSE 100 shares now rather than waiting in…

Read more »

Investing Articles

Is it time for me to change my tune about Rolls-Royce shares?

This Fool has steered clear of buying Rolls-Royce shares. But after its recent performance, he's reconsidering his stance. Here's why.

Read more »

Investing Articles

Aviva share price: 3 reasons to consider buying for 2024

The Aviva share price is still lower then when I bought some nearly a decade ago. Here's why I'm thinking…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

These 2 shares could bank me £328 a month in second income

Jon Smith runs through two FTSE stocks that have above-average dividend yields that could pay out a generous second income…

Read more »

Stack of one pound coins falling over
Investing Articles

This passive income plan is simple – but could earn me thousands!

Christopher Ruane explains how putting a fiver a day to work in the stock market might help him earn thousands…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Charticle

After record profits, are Lloyds shares a buy, sell, or hold?

As Lloyds pulls in pre-tax profits of £7.5bn, boosts its dividend, and continues to repurchase shares, are the company’s shares…

Read more »

Investing Articles

NatWest shares: is a once-in-a-lifetime opportunity on the way?

Should investors get ready for a unique opportunity as the UK government plans to sell off its NatWest shares later…

Read more »