Another year of strong growth

4imprint Group 3 March 2020 Update
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4imprint Group

Another year of strong growth

Final results

Media

3 March 2020

Price

2,720p

Market cap

£764m

£1:$1.30

Net cash ($m) at end December 2019 (excluding leases)

41.1

Shares in issue

28.1m

Free float

98.2%

Code

FOUR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(18.1)

(12.5)

33.7

Rel (local)

(9.9)

(4.8)

41.0

52-week high/low

3,500p

2,040p

Business description

4imprint is the leading direct marketer of promotional products in the US, Canada, the UK and Ireland. In FY19, 97% of revenues were generated in the US and Canada.

Next events

AGM

Early May 2020

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5700

4imprint Group is a research client of Edison Investment Research Limited

4imprint’s consistent approach of investing in marketing to grow its revenue base continues to produce results well in excess of the market growth. FY19 results are as indicated in January’s update, with the top line up 17%, from new and returning customers. 4imprint is the largest distributor of promotional products in the US, yet its market share is under 4%. The key unknown for FY20 is the coronavirus, although the supply chain is well stocked. Our revenue and earnings forecasts are broadly unchanged. There is potential for expansion of 4imprint’s valuation multiples once current global health uncertainties are resolved.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

738.4

46.1

129.4

70.0

27.2

2.0

12/19

860.8

55.6

153.9

84.0

22.9

2.4

12/20e

950.0

60.8

165.0

92.5

21.4

2.6

12/21e

1040.0

66.6

181.8

102.5

19.4

2.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Brand marketing to stay in the mix

FY19 marketing spend was up by 18%, with brand awareness spend on TV (and radio) staying in the mix, with some offset from reduced search and print. Revenue per marketing dollar of $5.58 was little changed from the prior year ($5.63). Marketing spend overall is managed with a view to maintaining level operating margins. Apparel is becoming more prominent in the order mix at around 20%, although it is still well below industry average of around one-third. The extension in FY19 of the Oshkosh distribution centre, at a cost of $5m, gives the building the footprint to keep pushing the proportion of apparel processed higher.

Cash conversion averages over 100%

Management indicates that FY20 capex will be around $9m, with the largest element allocated to increasing embroidery capacity within the extended building. There is no decision yet on the office building, where the lease has been extended on a short-term basis. Following a triennial valuation and reflecting both lower discount rates and to move closer to a position where a buy-out is feasible, the group is also to make a $10m lump sum contribution to the pension fund, in addition to the $3.2m annual payment. The dividend has increased by over 20% CAGR over the last five years. The group ended the year with net cash of $41.1m ($39.1m under IFRS 16) and we forecast a similar amount for the end of FY20.

Valuation: Premium for quality, growing earnings

4imprint’s shares continue to trade at a premium to quoted UK marketing services peers, with which however it has little in common. Its long, positive trading record, high cash conversion (five-year average: 105%) and progressive dividend single it out. A DCF on our numbers based on conservative assumptions of a 9% WACC and 3% terminal growth suggests a value of £29.66 per share, from £29.37 in our January update. An 8% WACC assumption indicates a value of £35.01.

Continued strong organic growth

North American revenues were ahead by 17% and these made up 97.5% of the group total in FY19. The UK was a much more difficult market, reflecting weakened levels of business confidence, particularly in the small and medium-sized organisations that form much of the core of 4imprint’s target market. UK’s revenue contribution remains small though. The UK operations delivered a small loss of $42k for the year.

Exhibit 1: Summary income statement

$m

2019

2018

Change

Revenue North America

839.3

714.6

17%

Revenue UK

21.6

23.9

-10%

Total revenue

860.8

738.4

17%

Gross profit

275.3

236.2

17%

Gross profit margin

32.0%

32.0%

Marketing costs

(154.3)

(131.2)

18%

% revenue

18.4%

18.4%

Selling costs

(31.0)

(27.9)

11%

% revenue

3.7%

3.9%

Admin costs

(31.8)

(27.5)

16%

% revenue

3.8%

3.8%

Head office costs

(3.3)

(3.7)

-11%

Operating profit (pre share option-related charges)

54.9

45.9

20%

Operating margin

6.4%

6.2%

Source: Company accounts

These figures are reported under IFRS 16, which has limited impact on the income statement – an adjustment of a $232k reduction in operating expenses and an increase of $45k in finance costs, resulting in a net increase in PBT of $187k. On the balance sheet, assets are increased by $1.9m, while lease liabilities of $2.0m are now included.

First weeks of FY20 on track

Management reports that the first two months of the new financial year have traded well, with the revenue trajectory firmly on track to meet the target of over $1bn by FY22. Our forecast for FY20 is close to this level at $950m, with $1,040m modelled for FY21e, implying the target will be reached a year ahead of plan.

This all carries the proviso that the coronavirus situation does not significantly worsen. In the short term, there is no cause for concern on the trading front. 4imprint has close relationships with its domestic suppliers and back up through the supply chain. The timing of the onset of the virus outbreak, just ahead of Chinese New Year, meant North American stockists had built up their inventory to cover the normal hiatus. Many of the Far Eastern suppliers are now resuming manufacturing and management is reasonably relaxed that supply issues should be manageable. Should the outbreak take hold in the US, however, this could lead to lower demand as the economy is hit and businesses reduce their own marketing spend and presence at trade shows. It is far too early to make any quantitative judgements on the potential impact.

Cash resource allows for flexibility

The group’s priorities for cash utilisation are firstly, to continue to fund the growth if the business, then to pay progressive dividends (or flat at the low point of any cycle), and thirdly to address the historic pension liability. M&A and special distributions are lower on the list.

The main Oshkosh warehouse in FY19 was extended by 85k sqft, on time and inside the $5m budget, taking it to over 300k sqft (for video footage see our note from January 2019). The capital spending outlined for the current year of $9.0m (management guidance) includes $5.0m in embroidery machinery and just over $3m for infrastructure and equipment to improve efficiency at the facility.

The office and customer contact centre in Central Oshkosh is effectively operating at capacity and a decision will need to be made within the year on additional space.

Post the triennial revaluation of the group pension scheme, management has agreed a new programme of payments with the Trustees, including a one-off around $10m, likely to be paid in May 2020. Ongoing payments will continue of £2.5m ($3.3m) per annum, increasing at 3%. As with many other corporate schemes, shifting bond yields leading to lower discount rates and a tougher regulatory regime mean that it is less well funded than had been hoped at the time of the previous valuation. At end FY19, gross liabilities were $36.3m, against assets of $24.0m. This step-up in funding puts the schedule back on track, with a view to being able to fund an eventual buyout.

These factors combine to leave our forecast end FY20 modelled net cash figure at around the same level posted for end FY19, despite the group’s inherently high cash conversion. For the following year, we anticipate the cash resource will resume building.

Exhibit 2: Financial summary

$000s

2017

2018

2019e

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

627,518

738,418

860,844

950,000

1,040,000

Cost of Sales

(422,299)

(500,531)

(585,524)

(640,676)

(701,376)

Gross Profit

205,219

237,887

275,320

309,324

338,624

EBITDA

 

 

45,092

48,507

59,166

65,062

70,983

Operating Profit (before amort. and except).

 

 

42,580

45,862

54,882

59,962

65,883

Intangible Amortisation

(464)

0

0

0

0

Operating Profit (after amort. and before except.)

 

 

42,116

45,862

54,882

59,962

65,883

Operating Profit

41,284

44,322

53,620

58,962

64,883

Net Interest

(122)

227

751

870

692

Net pension finance charge

(503)

(403)

(378)

(378)

(378)

Profit Before Tax (norm)

 

 

42,458

46,089

55,633

60,832

66,575

Profit Before Tax (IFRS)

 

 

40,659

44,146

53,993

59,454

65,197

Tax

(11,734)

(8,952)

(11,276)

(12,904)

(14,167)

Profit After Tax (norm)

30,724

36,734

43,410

46,528

51,007

Profit After Tax (IFRS)

28,925

35,194

42,717

46,550

51,029

Discontinued businesses

0

(100)

0

0

0

Net income (norm)

 

 

30,291

36,360

43,278

46,357

50,836

Net income (IFRS)

 

 

28,925

35,094

42,720

45,750

50,229

Average Number of Shares Outstanding (m)

28.0

28.0

28.0

28.0

28.0

EPS - normalised (c)

 

 

107.7

129.4

153.9

165.0

181.1

EPS - (IFRS) (c)

 

 

103.1

125.6

152.4

166.1

182.1

Dividend per share (c)

58.1

70.0

84.0

92.5

102.5

Gross Margin (%)

32.7

32.2

32.0

32.6

32.6

EBITDA Margin (%)

7.2

6.6

6.9

6.8

6.8

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

6.8

6.2

6.4

6.3

6.3

BALANCE SHEET

Fixed Assets

 

 

25,879

25,732

31,844

35,744

33,467

Intangible Assets

0

0

0

0

0

Other intangible assets

1,138

1,084

1,152

1,152

1,152

Tangible Assets

18,829

19,012

24,369

28,269

26,869

Right of use assets

0

0

1,985

1,985

1,108

Deferred tax assets

5,912

5,636

4,338

4,338

4,338

Current Assets

 

 

82,831

84,234

105,631

114,672

142,622

Stocks

7,940

9,878

11,456

12,895

14,399

Debtors

44,124

46,872

53,039

58,532

64,077

Cash

30,767

27,484

41,136

43,245

64,145

Other

0

0

0

0

0

Current Liabilities

 

 

(49,024)

(50,752)

(60,839)

(66,971)

(73,161)

Creditors

(48,878)

(50,752)

(59,209)

(65,341)

(71,531)

Short term / lease borrowings

0

0

(1,630)

(1,630)

(1,630)

Long Term Liabilities

 

 

(18,604)

(15,947)

(13,688)

(1,763)

(1,383)

Long term borrowings

0

0

(415)

(415)

(415)

Other long term liabilities (including pension)

(18,604)

(15,947)

(13,273)

(1,348)

(968)

Net Assets

 

 

41,082

43,267

62,948

81,682

101,544

CASH FLOW

Operating Cash Flow

 

 

44,576

45,583

58,474

64,210

71,668

Net Interest

(122)

227

751

870

692

Tax

(12,751)

(7,844)

(10,318)

(13,075)

(14,338)

Capex

(2,359)

(2,855)

(8,178)

(9,000)

(3,700)

Acquisitions/disposals

0

0

0

0

0

Pension contributions

(3,675)

(3,932)

(3,593)

(13,500)

(3,500)

Financing

(1,359)

(465)

(3,245)

(2,200)

(2,200)

Dividends

(15,845)

(32,984)

(20,659)

(24,375)

(26,901)

Other

0

0

(1,687)

(821)

(821)

Net Cash Flow

8,465

(2,270)

11,545

2,109

20,900

Opening net debt/(cash)

 

 

(21,683)

(30,767)

(27,484)

(39,091)

(41,200)

Net impact of disposals etc

0

0

0

0

0

Other

619

(1,013)

62

0

0

Closing net debt/(cash)

 

 

(30,767)

(27,484)

(39,091)

(41,200)

(62,100)

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by 4imprint and prepared and issued by Edison, in consideration of a fee payable by 4imprint. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by 4imprint and prepared and issued by Edison, in consideration of a fee payable by 4imprint. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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