IG Design Group — Australian cards on the table

IG Design Group — Australian cards on the table

IG Design is extending its position in the Australian greeting card market with the acquisition of Biscay Greetings, through its joint venture, Artwrap. Along with Artwrap’s previously-announced new major contract coming through, IG Design now has a wide product range and a strong market presence, particularly in the value sector. The deal (not yet reflected in our forecast) is set to complete after the key Christmas trading period. The full benefit will be felt in FY19, when we expect it to be earnings’ enhancing. Last month’s trading update showed good sales momentum into FY18, with the forecast growth and cash generation supporting the valuation.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

IG Design Group

Australian cards on the table

Acquisition

Care & household goods

21 September 2017

Price

356.5p

Market cap

£225m

$1.29/£

Net cash (£m) at 31 March 2017

3.0

Shares in issue

63.1m

Free float

41%

Code

IGR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.7)

7.7

32.8

Rel (local)

(1.0)

10.2

23.9

52-week high/low

387.5p

229.0p

Business description

IG Design Group is one of the world's leading designers, innovators and manufacturers of gift packaging and greetings, social expression giftware, stationery and creative play products.

Next events

Interim results

28 November 2017

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Anne Margaret Crow

+44 (0)20 3077 5700

IG Design Group is a research client of Edison Investment Research Limited

IG Design is extending its position in the Australian greeting card market with the acquisition of Biscay Greetings, through its joint venture, Artwrap. Along with Artwrap’s previously-announced new major contract coming through, IG Design now has a wide product range and a strong market presence, particularly in the value sector. The deal (not yet reflected in our forecast) is set to complete after the key Christmas trading period. The full benefit will be felt in FY19, when we expect it to be earnings’ enhancing. Last month’s trading update showed good sales momentum into FY18, with the forecast growth and cash generation supporting the valuation.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/16

237.0

11.1

13.5

2.5

26.4

0.7

03/17

311.0

17.1

18.8

4.5

19.0

1.3

03/18e

325.0

20.0

20.5

5.5

17.4

1.5

03/19e

335.0

22.5

22.9

6.5

15.6

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Forecasts not adjusted for deal.

Doubling share of Australian value card market

Management estimates that the acquisition of Biscay’s trade and assets will double IG Design’s share of the value greeting card market in Australia. Founded in 1971, Biscay has a well-established and sizeable customer base and there should be plenty of opportunity for cross-sales. The Artwrap 50:50 JV has been through considerable upheaval over recent periods as it reoriented sales away from the commoditised Christmas market, with a new CEO appointed in April 2017. As previously reported, it won a major three-year contract for ‘everyday’ cards, with some associated upfront costs affecting margins in the short term. This new deal will also need some restructuring (cost estimated at £0.4m, including transaction costs), but should bring economies of scale that will help drive margin recovery over the next couple of years. On a pro-forma basis, the Australian business should generate c 13% of revenues in FY19, with the US continuing to dominate at 39%.

Earnings enhancing in FY19

The purchase is being debt-funded and will cost A$9m, representing 2.7x EBITDA (for the year to end-June 2017). The timing of the deal means little impact in the current year and a modest uplift to earnings in FY19 (our preliminary assessment is about 3%). The balance sheet, significantly strengthened through cash generation, allows for further scope for similar deals in adjacent categories or geographies.

Valuation: Underpinned by cash generation

The share price has settled back a little after a strong run over 12 months as the market has recognised the group’s transformation into a confident, global, design-led, efficient partnership supplier to retail channels. At the current level, and before taking into account the enhancement to earnings from this deal, a reverse DCF shows that the current share price assumes either medium-term growth of around 2% or EBITDA margins remaining broadly static beyond our forecast period. Strong cash flow generation and dividend progress also support the current valuation.

Exhibit 1: Financial summary

£000s

2016

2017

2018e

2019e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

236,950

310,992

325,000

335,000

Cost of Sales

(193,552)

(247,059)

(258,050)

(265,990)

Gross Profit

43,398

63,934

66,950

69,010

EBITDA

 

 

16,505

20,662

26,000

28,500

Operating Profit (before amort and except)

 

12,909

16,091

21,500

24,000

Intangible Amortisation

(285)

(798)

(825)

(825)

Exceptionals

0

(1,037)

(200)

0

Share-based payments

(908)

(2,216)

(1,800)

(1,500)

Operating Profit

11,716

12,040

18,675

21,675

Net Interest

(2,763)

(1,229)

(1,500)

(1,500)

Profit Before Tax (norm)

 

 

11,054

17,078

20,000

22,500

Profit Before Tax (FRS 3)

 

 

8,953

10,811

17,175

20,175

Tax

(2,219)

(2,719)

(5,202)

(6,135)

Profit After Tax (norm)

8,835

12,143

14,798

16,365

Profit After Tax (FRS 3)

6,734

8,092

11,973

14,040

Average Number of Shares Outstanding (m)

59.3

61.5

63.0

63.1

EPS - normalised (p)

 

 

13.9

19.6

21.2

23.7

EPS - normalised fully diluted (p)

 

 

13.5

18.8

20.5

22.9

EPS - (IFRS) (p)

 

 

10.7

12.1

17.9

21.2

Dividend per share (p)

2.5

4.5

5.5

6.5

Gross Margin (%)

18.3

20.6

20.6

20.6

EBITDA Margin (%)

7.0

6.6

8.0

8.5

Operating Margin (before GW and except.) (%)

5.4

5.2

6.6

7.2

BALANCE SHEET

Fixed Assets

 

 

66,722

71,686

76,361

78,536

Intangible Assets

32,236

33,681

32,856

32,031

Tangible Assets

34,486

38,005

43,505

46,505

Investments

0

0

0

0

Current Assets

 

 

75,791

83,063

88,071

92,397

Stocks

46,006

49,475

50,669

51,184

Debtors

21,405

29,929

30,652

30,963

Cash

8,380

3,659

6,750

10,250

Other

0

0

0

0

Current Liabilities

 

 

(48,331)

(60,338)

(61,377)

(62,066)

Creditors

(42,765)

(59,622)

(61,127)

(61,816)

Short term borrowings

(5,566)

(716)

(250)

(250)

Long Term Liabilities

 

 

(22,810)

(4,361)

(4,356)

(4,356)

Long term borrowings

(20,297)

26

0

0

Other long term liabilities

(2,513)

(4,387)

(4,356)

(4,356)

Net Assets

 

 

71,372

90,050

98,699

104,511

CASH FLOW

Operating Cash Flow

 

 

20,744

31,527

23,500

23,800

Net Interest

(1,961)

(1,867)

(1,500)

(1,500)

Tax

(1,797)

(2,003)

(4,160)

(6,068)

Capex

(3,191)

(4,959)

(10,000)

(7,500)

Acquisitions/disposals

0

(2,699)

0

0

Financing/Other

74

5,086

0

0

Dividends

(1,032)

(3,001)

(3,926)

(4,607)

Net Cash Flow

12,837

22,084

3,914

4,124

Opening net debt/(cash)

 

 

29,373

17,483

(2,969)

(6,500)

HP finance leases initiated

0

0

0

0

Other

(947)

(1,632)

(383)

(624)

Closing net debt/(cash)

 

 

17,483

(2,969)

(6,500)

(10,000)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IG Design Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IG Design Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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