You might have come across one of the firm’s 484 stores, or its website. They sell gifts, arts, crafts, toys, books and stationery. I hesitate to describe the company as a value retailer because I remember the days before the firm was taken over in 2008 by a company called Endless LLP. In my experience, pre-2008, the stores offered unmissable bargains in books and other items but, to me, the in-store prices these days aren’t as compelling as they were. However, Endless LLP reinvigorated the firm’s offering and provided the impetus for the current impressive growth trajectory.

New to the stock market

The company arrived on the stock market with its Initial public offering (IPO) last July, which put its firmly on my radar for interesting opportunities. Well-known successful US investor and trader Mark Minervini said in his book, Trade Like a Stock Market Wizard, that the biggest part of a company’s growth usually occurs within the first five to 10 years following its IPO. He reckons “that crucial period is when management tends to be at its entrepreneurial best.”

Today’s interim results report reveals a net 32 new stores were opened in the six-month period to 28 October, and the firm expects to have opened a net 50 new stores for the full year. There seems no doubt that the management team is ‘going for it’ when it comes to growth. My Foolish colleague Roland Head pointed out that the Card Factory’s founder, Dean Hoyle, invested in The Works in 2015 and became the firm’s chairman.

Roland explained that “Mr Hoyle grew Card Factory from a market stall to a company with annual profits of £50m in just 12 years,” which I think is an impressive indicator of his entrepreneurial credentials. Although he sold a few of his shares in The Works in the IPO, his holding is still an impressive 14%, or so, which means he’s got a lot riding on the outcome of the growth strategy, and he’s aligned with investors like us.

Trading well

The firm said in today’s report that revenue increased by 15% compared to the equivalent period last year, with like-for-like sales up 3.8%, which suggests the firm’s offering is resonating with its customers. Sales momentum continued through the Christmas period, although the company reported a first-half loss rather than a profit, because of the second-half weighting of the business. City analysts following the firm expect robust double-digit percentage advances in full-year earnings, so I don’t think the first-half loss is much to worry about.

The great thing is that the share price has fallen since the IPO. Today’s 135p, or so, puts the forward earnings multiple for the trading year to April 2020 at just over 11, and the forward dividend yield is around 3.5%. I’m tempted to hop aboard the growth story by buying some of the firm’s shares. 

The post Why I’d buy shares in this newly-listed, dividend-paying and growing small-cap appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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.

The post Should you keep buying The Works IPO after share price climbs 10%? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.