Thaw in progress

4imprint Group 22 June 2020 Update
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4imprint Group

Thaw in progress

Trading update

Media

22 June 2020

Price

2,565p

Market cap

£721m

$1.26:£1

Net cash ($m) at end May 2020

28.1

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

22.1

94.3

(3.2)

Rel (local)

15.7

55.4

12.2

52-week high/low

3,500p

1,320p

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

Interim results

13 August 2020

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

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

4imprint’s order volumes are starting to recover as the US economy reopens. The company has been diligent at updating the market and the latest update shows order levels improving towards 50% of prior year, having dipped as low as 20% in early April. Cash conservation measures are having the desired effect and the group still had $28.1m cash (with lease debt only) at the end of May, despite having paid out $9.4m as a one-off lump sum into the pension scheme as scheduled. Based on assumptions over the speed and extent of the recovery but in the absence of formal management guidance, we have reinstated provisional forecasts.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

738.4

46.1

129.4

70.0

19.8

2.7

12/19

860.8

55.6

153.9

84.0**

16.7

3.3

12/20e

550.0

8.8

20.5

10.0

125.1

0.4

12/21e

600.0

28.0

73.9

37.5

34.7

1.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **84c declared, 25c paid.

Tentative forecasts reinstated

In earlier trading updates, management outlined order volumes in January and February ahead by 13% over FY19. By early April, these had dropped sharply to around 20% of prior year levels. As the US economy slowly rebounds, weekly order counts have rebuilt to nearer half of those achieved in June 2019. By making assumptions about the ‘normal’ monthly sales distribution and pencilling in a steady build across H220 up to 80% of order volume by the year end, we have derived a revenue estimate for the year of $550m, which assumes a direct correlation between order volumes and order values. For FY21e, we have pencilled in an 9% increase from the lower levels, roughly the gain we were anticipating before withdrawing forecasts, but off the lower base.

Greater subjectivity in earnings assumptions

Translating this into an earnings figure involves significant levels of speculation, with marketing spend the key variable. This spend was not turned off completely in H1, with continuing brand awareness campaigns online and on TV. We assume that mailshots and sample boxes, however, will have been paused. The group has retained its staff throughout the pandemic, with most either working from home or unutilised, waiting to be recalled. Office and warehouse locations in the US and in the UK have now reopened. We have assumed a lower FY20 gross margin (28% from 32%), slightly reduced marketing spend and lower capex for the year.

Valuation: Many moving parts

Having started the year at all-time highs around £35, the share price fell away sharply in March as the severity of the potential impact on the US economy became apparent. From a low of £13.20, the shares have staged a good recovery. While reduced earnings prospects for FY20e and FY21e and lower cash inflate multiples, 4imprint’s fundamentals remain favourable, with a cash-positive balance sheet and a growing share of a what will still be a substantial market for promotional goods.

Basis of assumptions

Revenue assumptions

There is still a great deal of uncertainty over the prospects for the US economy for the remainder of FY20 and FY21, particularly if there is a second wave of the COVID-19 pandemic. 4imprint’s customers span the spectrum of US enterprises. Those at the smaller end will likely have been the most heavily affected and may not all survive. We are therefore not building in a full recovery in demand; rather a staged improvement over the second half of the year.

Exhibit 1: Revenue assumptions

Weighting

Implied FY19 revenue ($m)

Assumed FY20 vs implied FY19 change (%)

Assumed FY20 revenue ($m)

Half-yearly revenue
($m)

% change

Jan

5%

39

+13

45

Feb

7%

55

+13

62

Mar

9%

71

-65

25

Apr

10%

79

-75

20

May

10%

79

-63

29

Jun

9%

71

-50

35

216

-45.2%

Jul

9%

80

-40

48

Aug

7%

62

-30

44

Sep

10%

89

-30

62

Oct

10%

89

-25

67

Nov

8%

71

-20

57

Dec

6%

53

-20

43

320

-28.0%

100%

839

536

UK H120

6

UK H220

8

UK FY20

14

H1 group

222

H2 group

328

FY20

550

-35%

Source: Edison Investment Research

Earnings assumptions

We have assumed a softening of gross margin from 32% to 28%, reflecting the retention of staff across the harshest period of the downturn, plus an element of softness from the imposition of US-China tariffs. There is therefore an element of recovery factored into our FY21 numbers, rebuilding to 31.5%.

With the retention of staff, we are modelling selling costs broadly flat, but are assuming some reductions in administration and central costs, reflecting comments in the trading updates with respect to cost management, reduced travel etc.

Hardest to model are the assumptions on marketing spend. The finesse of the level of marketing spend and the mix is at the core of 4imprint’s competence and success. In normal times, the level spend is flexed to grow the business while maintaining a broadly stable operating margin. In these abnormal times, it is reasonable to assume that spend on catalogues is well down on the prior year as the recipients’ businesses would be closed and spend on promotional products likely not have been a top priority. However, 4imprint has continued to spend on brand awareness, with TV campaigns and online/ search. This will have been necessary to ‘keep the engines running’ but we would expect the overall level of marketing spend to step up as activity levels increase.

Flexing these assumptions – particularly those relating to the level of marketing spend - obviously leads to different conclusions on earnings and we will doubtless be reworking them as the year progresses.

Impact on cash

At the December year-end, the group had cash of $41.1m, with no bank debt and $2.0m of IFRS-related lease debt on the balance sheet. At the end of March, this figure had risen to over $50m. The latest update discloses end-May cash of $28.1m, a reduction of over $22m. However, this includes the $9.4m one-off lump sum payment into the pension scheme, as agreed previously with the trustees. End March to end May covers the period with the most severe impact of COVID-19 on the US corporate economy and on 4imprints order intake.

By retaining the staff cost base (and the integrity of the business), the business is therefore consuming cash, but always has the option of dialling down the marketing spend on a temporary basis. It is therefore not possible to quantify a ‘cash burn’ rate that can be extrapolated across the remainder of the year. As well as the cash now on the balance sheet, the group also has a working capital facility of $20m available if required.

The final dividend for FY19 of 59 cents was withheld to conserve cash. We have also reduced our estimate of capex for FY20 from $9.0m to $3.0m, which includes spend on direct-to-garment printing already undertaken. Our modelling on the assumptions as outlined above shows a year-end cash projection of $26.8m (not including IFRS lease debt), before rebuilding in FY21e.

Exhibit 2: Financial summary

$000s

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

738,418

860,844

550,000

600,000

Cost of Sales

(500,531)

(585,524)

(396,000)

(410,814)

Gross Profit

237,887

275,320

154,000

189,187

EBITDA

 

 

48,507

59,166

13,650

32,830

Operating Profit (before amort. and except).

 

 

45,862

54,882

8,550

27,730

Intangible Amortisation

0

0

0

0

Operating Profit (after amort. and before except.)

 

 

45,862

54,882

8,550

27,730

Operating Profit

44,322

53,620

7,150

26,330

Net Interest

227

751

250

270

Net pension finance charge

(403)

(378)

(378)

(378)

Profit Before Tax (norm)

 

 

46,089

55,633

8,800

28,000

Profit Before Tax (IFRS)

 

 

44,146

53,993

7,422

26,622

Tax

(8,952)

(11,276)

(1,457)

(5,681)

Profit After Tax (norm)

36,734

43,410

5,943

20,919

Profit After Tax (IFRS)

35,194

42,717

5,965

20,941

Discontinued businesses

(100)

0

0

0

Net income (norm)

 

 

36,360

43,278

5,772

20,748

Net income (IFRS)

 

 

35,094

42,720

5,165

20,141

Average Number of Shares Outstanding (m)

28.0

28.0

28.0

28.0

EPS - normalised (c)

 

 

129.4

153.9

20.5

73.9

EPS - (IFRS) (c)

 

 

125.6

152.4

21.3

74.7

Dividend per share (c)

70.0

84.0

10.0

37.5

Gross Margin (%)

32.2

32.0

28.0

31.5

EBITDA Margin (%)

6.6

6.9

2.5

5.5

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

6.2

6.4

1.6

4.6

BALANCE SHEET

Fixed Assets

 

 

25,732

31,844

29,744

27,467

Intangible Assets

0

0

0

0

Other intangible assets

1,084

1,152

1,152

1,152

Tangible Assets

19,012

24,369

22,269

20,869

Right of use assets

0

1,985

1,985

1,108

Deferred tax assets

5,636

4,338

4,338

4,338

Current Assets

 

 

84,234

105,631

67,581

83,731

Stocks

9,878

11,456

7,246

7,905

Debtors

46,872

53,039

33,548

36,598

Cash

27,484

41,136

26,787

39,228

Other

0

0

0

0

Current Liabilities

 

 

(50,752)

(60,839)

(39,837)

(43,311)

Creditors

(50,752)

(59,209)

(38,207)

(41,681)

Short term / lease borrowings

0

(1,630)

(1,630)

(1,630)

Long Term Liabilities

 

 

(15,947)

(13,688)

(1,763)

(1,383)

Long term borrowings

0

(415)

(415)

(415)

Other long term liabilities (including pension)

(15,947)

(13,273)

(1,348)

(968)

Net Assets

 

 

43,267

62,948

55,725

66,504

CASH FLOW

Operating Cash Flow

 

 

45,583

58,474

6,550

33,600

Net Interest

227

751

250

270

Tax

(7,844)

(10,318)

(1,628)

(5,852)

Capex

(2,855)

(8,178)

(3,000)

(3,700)

Acquisitions/disposals

0

0

0

0

Pension contributions

(3,932)

(3,593)

(13,500)

(3,500)

Financing

(465)

(3,245)

(2,200)

(2,200)

Dividends

(32,984)

(20,659)

0

(5,356)

Other

0

(1,687)

(821)

(821)

Net Cash Flow

(2,270)

11,545

(14,349)

12,441

Opening net debt/(cash)

 

 

(30,767)

(27,484)

(39,091)

(24,742)

Net impact of disposals etc

0

0

0

0

Other

(1,013)

62

0

0

Closing net debt/(cash)

 

 

(27,484)

(39,091)

(24,742)

(37,183)

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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