AJ Bell press comment – 30 November 2022
- Debt lower than expected and management now expecting a pre-tax profit for the year to March 2023
- Though net debt rose from $59 million in March to $74 million as company also passes on its interim dividend
- 8% year-on-year increase in first half sales
- Operating margin of 6.7% an improvement on last year’s 4.4%
“Barely a year after the firm issued the first of two thumping profit warnings, greetings cards, crafting, gifts and gift-wrapping specialist IG Design is offering its shareholders some welcome seasonal cheer,” says AJ Bell investment director Russ Mould. “Debt is lower than expected, cost cuts are helping to support operating margins and management now expects a small pre-tax profit rather than a loss for the full-year to March 2023. All of those trends should also help management and new chief executive Paul Bal, as they seek to refinance the company’s debt in the next six months.
“Admittedly, net debt still rose to $74 million from $59 million in March at the end of the last financial year, and IG Design passed on its interim dividend, just as it did on last year’s scheduled final payment.
Source: Company accounts. Financial year to March. Company known as International Greetings until June 2016.
“This is 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 company’s then CEO John Dammermann and his wife, as well as 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 bring challenges too. 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. A refinancing in the next six months would give management additional room within which to work as the board and new boss seek to effect 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 93% of budgeted sales for the year.
“That also helped to drive an 8% year-on-year increase in first half sales and an improvement in pre-tax profit to $32 million from $19 million in the same six-month period a year ago.
“A stated operating margin of 6.7% was also an improvement on last year’s 4.4%, as IG Design cut costs and sought efficiencies to combat the twin threats of input cost inflation and pressure from major customers.
Source: Company accounts. Financial year to March. Company known as International Greetings until June 2016.
“That still isn’t a particularly fat return on sales and so IG Design still has much work to do as it looks to recover from 2021’s woes, especially if the global economy turns down and consumers cut spending on gifts, crafting and stationery. Inventory is up by a third year-on-year in the first half. Compare that to the 8% increase in sales and it seems possible there may be a need to shift that stock at a discount, which could hurt margins if that is the case.
“Nevertheless, the company is now forecasting a small pre-tax profit for the year to March 2023, when management had previously expected a loss.
“That offers some hope, and the shares could end up looking very cheap if the turnaround can be made to stick. The £118 million market cap looks low relative to consensus forecasts for sales of $836 million (£690 million at current exchange rates), even adjusting for the debt pile, while the 121.5p 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.
“A refinancing of debt would also reassure, and this should be do-able – the current ratio (current assets divided by current liabilities) of 1.5 times is not too bad, although the quick, or acid test, ratio (cash plus receivables divided by current liabilities) of 0.65 times does offer less wiggle room if anything else goes unexpectedly wrong.”
