“The results are hardly great, and the share price is clearly far from convinced, but this month’s debt refinancing out until 2026 and a reduction in net borrowings in the year to the end of March both mean that IG Design’s revamped management team has space in which to work and put their turnaround plan into place,” says AJ Bell investment director Russ Mould. “Net debt, including leases, fell to $30 million from $74 million in the second half and from $59 million a year ago, helped by the cancellation of the dividend and better-than-expected profits, thanks in the main to restructuring efforts in the USA, where the AIM-quoted firm is also extricating itself from unprofitable contracts.
Source: Company accounts. Financial year to March. Company known as International Greetings until June 2016.
“Those revenues, and the need to turnaround the US operations in particular, are still the uncomfortable legacy of two acquisitions.
“The first was 2018’s purchase of the American business Impact Innovations, for an upfront price of £56.5 million in cash, supplemented by a £15.4 million share award to the purchase’s then CEO John Dammermann and his wife and a £27.9 million investment in stock and working capital, for an all-in cost of just under £100 million.
“The second was 2020’s swoop for America’s CSS Industries for £90 million, including debt.
“Both deals broadened IG Design’s geographic reach, customer base and product range but they brought debt, an increased reliance on seasonal business at Thanksgiving and Christmas and exposure to retail giants such as Wal-Mart. While such sales relationships can be very helpful given the route to market that they offer, they can also bring challenges. IG Design outsources the majority of its product production and at a time of inflation and rising freight and input costs that leaves the firm as the meat in the sandwich between sub-suppliers on one side and price and margin-conscious retail buyers on the other.
“These challenges lay at the heart of IG Design’s profit warnings of October 2021 and January 2022. A slump in profits also made it harder to service the debt and stay within banking covenants although careful management of working capital and costs mean that the AIM-quoted concern has managed to do just that. A refinancing in the next six months would give management additional room within which to work as the board and new boss seek to affect a turnaround in the company’s fortunes.
“At least retail customers such as Tesco, Lidl and Carrefour in Europe and Kroger and Wal-Mart in the USA seem to be keeping the faith, since IG Design can point to an order book which already covers 62% of budgeted sales for the year (although that is down from 71% at the same point a year ago and analysts are only expecting flat sales for the new fiscal year to March 2024).
“Despite a drop in fiscal 2023’s sales and input cost pressures, notably in the UK, underlying operating profits and margins rose slightly year-on-year, even once a write-down of goodwill is excluded, albeit from a low base.
Source: Company accounts. Financial year to March. Company known as International Greetings until June 2016.
“A 1.8% underlying return on sales is nothing to write home about and IG Design still has much work to do as it looks to recover from the last two years’ woes, especially if the global economy turns down and consumers do cut spending on gifts, crafting and stationery. At least the improvement in margins means that operating profit covers the net interest bill by more than two times and inventory is down year-on-year, to mitigate danger that the firm will need to discount to shift excess stock.
“Ultimately, IG Design began fiscal 2023 by forecasting a pre-tax loss for the year and it exceeded that low bar. The first encouraging signs are there but the company must now convince investors that its goal of returning to pre-pandemic operating margins of around 7% by March 2025 is a credible proposition if the share price is to catch light.
“If that recovery is made, then IG Design’s stock could look cheap. That offers some hope, and the shares could end up looking very cheap if the turnaround can be made to stick. The $166 million (£130 million) market cap looks low relative to consensus forecasts for sales of $722 million (£565 million at current exchange rates) for fiscal 2024, even adjusting for leases and debt, while the 134p share price would look awfully tempting if earnings per share get anywhere near their 2020 peak of 16.9p and the dividend ever gets near to 8.75p again.
“The debt refinancing should help to reassure, as should other balance sheet metrics. The current ratio (current assets divided by current liabilities) improved to 2.0 times from 1.8 times in fiscal 2023, although the quick, or acid test, ratio (cash plus receivables divided by current liabilities) could do with improving a little from 0.91 times, even if that represents a step up from last year’s 0.77. A ratio of 1.00 would make for better, more comfortable reading.”
