4imprint Group — Update 2 August 2016

4imprint Group (LSE: FOUR)

Last close As at 19/04/2024

GBP62.00

−80.00 (−1.27%)

Market capitalisation

GBP1,747m

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Research: TMT

4imprint Group — Update 2 August 2016

4imprint Group

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

4imprint Group

Interims and dividend increase

Interim results

Media

2 August 2016

Price

1,480p

Market cap

£416m

$1.32/£

Net cash ($m) at 30 June 2016

20.0

Shares in issue

28.1m

Free float

88%

Code

FOUR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.3

12.4

9.7

Rel (local)

8.8

5.8

10.1

52-week high/low

1,480p

1,100p

Business description

4imprint is the leading direct marketer of promotional products in the US, Canada, the UK and Ireland. 96% of 2015 revenues were generated in the US and Canada.

Next events

Trading update

October 2016

Trading update

January 2017

Final results

March 2017

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

4imprint is a research client of Edison Investment Research Limited

4imprint continues to grow its top line well ahead of US GDP and market, driven by ongoing investment in marketing, people and systems. Like-for-like H116 revenues were up over 15%, compared with our unchanged FY16 forecast of +13%. The large but fragmented market, estimated at over US$25bn, gives a substantial further opportunity, with organic growth the preferred (and proven) route. With the pension situation addressed and marketing spend well supported, the interim dividend has been lifted 35%.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

415.8

27.9

71.5

32.4

27.3

1.7

12/15

497.2

33.5

87.5

38.9

22.3

2.0

12/16e

560.0

37.7

94.6

52.5

20.7

2.7

12/17e

616.0

41.6

104.6

57.5

18.7

2.9

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

Clear organic growth strategy

The group has a clear strategy: to grow organically, while delivering a broadly constant operating margin. By running an efficient operation, with data-driven direct marketing techniques targeted at stimulating both offline and online sales, the group has been continuing to win market share from smaller, local distributors. The additional sales come from both new and existing customers, with the total number of customised orders processed in H116 up by 14% like-for-like on the comparative period. Gross margins remain consistent and sales and administration costs were well controlled, although an additional week’s trading pushed marketing costs ahead by 20%. However, this is the key driver of future revenues and, over the last five years, each marketing dollar has delivered $5.97 on average in revenue.

Dividend growth moves up the priority list

The business is inherently highly cash generative, with little need for major capital spend, although in FY15, there was a spike with the $9m investment at its base in Oshkosh to support the five-year growth plan. The major call on cash over recent years has been the legacy defined benefit pension scheme, which has now been considerably de-risked. A one-off payment of £10m ($14.5m) in H116 leaves the scheme smaller and less potentially volatile, with future regular contributions in our model at $3.0m. Despite this lump sum payment, the group generated $9.2m of free cash flow in H1 and had net cash of $20.0m at 30 June. The interim dividend at 16.32c is 35% ahead of that for H115 and we assume a similar uplift for the final.

Valuation: Justified premium rating

While on a P/E basis 4imprint trades ahead of the smaller UK-based marketing services sector (FY16e P/E of 20.7x vs 11.1x), these stocks have little in common in terms of business model or geography. There are no direct quoted peers in either the UK or the US. The premium rating reflects the further growth opportunity and management’s record in delivering on its ambitions, including consistent high growth in earnings per share.

Dividend only change to estimates

Although H116 revenue growth at 17% is well ahead of our full year number, there is some benefit to these reported figures from a timing difference (an additional week’s trading in H116 vs H115), which is quantified in the statement at $4.5m, or around 2%. For the full year, FY16 will have 52 weeks against FY15’s 53, equivalent to around $4m, although this was known when we drew up our figures earlier in the year. We have therefore left our revenue and earnings estimates unchanged, but with a greater degree of comfort.

The group should derive modest benefit from sterling weakness post the Brexit vote, principally at the cash flow level. 97% of H116 revenues were earned in US dollars, with UK earnings also ahead but growing at a slower rate of 7%. Sterling’s importance to the group is in two key respects:

The scale of the net pension liability, and contributions to the legacy scheme (which are made in sterling).

Dividend payments: these are declared in US dollars and translated to sterling at the then current rate.

Legacy pension scheme shrinks in significance

Over recent years, the sorting out of the legacy pensions issue has been the highest priority for the group in terms of capital allocation. This scheme has been closed for a number of years and has 1,087 pensioners. Of these, 906 now have insured benefits and 483 are deferred. Following moves to ‘buy-in’ the liabilities over recent periods, 76% of total scheme liabilities are now insured. More recently, 4imprint has been running a programme to move pensions in payment across to a ‘buy-out’ basis and move deferred pensioners across into a new scheme, which will allow the associated gross assets and liabilities to come off the group balance sheet. The one-off contribution of £10m was to facilitate this process and provide funding for the new smaller plan, and these figures also carry an exceptional charge of $2.5m, reflecting the cost of the exercise. The deficit at end H116 was $16.4m, compared with $23.1m at the end of FY15.

With last year’s upgrade investment at Oshkosh (in both facilities and systems), the internal requirements for cash are greatly reduced. Hence the substantial increase in the level of dividend payout. The indication is for a similar level of uplift at the year-end. For FY17, we have assumed that the dividend continues to rise in proportion to earnings. Despite this higher level of payout, our model shows cash (there is no debt) of $15.6m at end FY16, rising to $26.6m by end FY17.


Exhibit 1: Financial summary

$000s

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

332,936

415,773

497,219

560,000

616,000

Cost of Sales

(223,915)

(278,564)

(334,622)

(376,886)

(414,575)

Gross Profit

109,021

137,210

162,598

183,114

201,425

EBITDA

 

 

21,490

29,460

35,478

39,716

44,185

Operating Profit (before amort and except)

19,494

27,759

33,519

37,616

41,587

Operating Profit

14,530

23,239

31,127

32,146

39,917

Net Interest

61

100

30

34

38

Net pension finance charge

0

0

0

0

0

Profit Before Tax (norm)

 

 

19,555

27,859

33,549

37,650

41,625

Profit Before Tax (FRS 3)

 

 

14,472

23,339

31,157

32,180

39,955

Tax

(3,857)

(6,982)

(8,462)

(9,654)

(11,986)

Profit After Tax (norm)

15,698

20,877

25,087

27,996

29,639

Profit After Tax (FRS 3)

10,615

16,357

22,695

22,526

27,969

Discontinued businesses

0

0

0

0

0

Net income (norm)

 

 

14,701

20,121

24,587

26,731

29,554

Net income (IFRS)

 

 

10,615

16,357

22,695

22,526

27,967

Average Number of Shares Outstanding (m)

26.5

27.4

27.9

28.1

28.1

EPS - normalised fully diluted (c)

 

 

52.8

71.5

87.5

94.6

104.6

EPS - (IFRS) (c)

 

 

40.1

59.7

81.3

80.2

99.6

Dividend per share (c)

27.7

32.4

38.9

52.5

57.5

Dividend per share (p)

17.0

20.5

26.6

39.8

43.6

Gross Margin (%)

32.7

33.0

32.7

32.7

32.7

EBITDA Margin (%)

6.5

7.1

7.1

7.1

7.2

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

5.9

6.7

6.7

6.7

6.8

BALANCE SHEET

Fixed Assets

 

 

16,476

15,197

23,753

25,253

26,253

Intangible Assets

0

0

0

0

0

Other intangible assets

1,349

1,298

1,211

1,211

1,211

Tangible Assets

8,803

9,105

18,154

19,654

20,654

Investments

0

0

0

0

0

Deferred tax assets

6,324

4,794

4,388

4,388

4,388

Current Assets

 

 

73,605

59,464

66,035

69,028

85,346

Stocks

3,686

4,353

4,460

5,023

5,525

Debtors

30,105

36,810

43,194

48,405

53,245

Cash

25,990

18,301

18,381

15,600

26,575

Other

13,824

0

0

0

0

Current Liabilities

 

 

(29,931)

(36,278)

(38,222)

(41,958)

(46,154)

Creditors

(29,931)

(36,049)

(37,254)

(41,958)

(46,154)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(27,398)

(24,015)

(23,114)

(13,455)

(13,455)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(27,398)

(24,015)

(23,114)

(13,455)

(13,455)

Net Assets

 

 

32,752

14,368

28,452

38,868

51,990

CASH FLOW

Operating Cash Flow

 

 

22,879

27,230

30,622

38,272

43,544

Net Interest

86

120

30

34

38

Tax

(2,714)

(6,187)

(8,730)

(9,451)

(11,299)

Capex

(2,028)

(2,092)

(10,912)

(3,100)

(3,100)

Acquisitions/disposals

1,484

9,717

0

0

0

Pension contributions

(4,966)

(26,544)

(825)

(15,800)

(3,000)

Financing

122

(1,316)

0

0

0

Dividends

(6,558)

(7,924)

(9,604)

(12,132)

(15,208)

Other

(113)

(689)

(501)

(600)

0

Net Cash Flow

8,192

(7,685)

80

(2,777)

10,975

Opening net debt/(cash)

 

 

(17,251)

(25,990)

(18,301)

(18,381)

(15,600)

Net impact of disposals etc

0

0

0

0

0

Other

547

(4)

0

(4)

0

Closing net debt/(cash)

 

 

(25,990)

(18,301)

(18,381)

(15,600)

(26,575)

Source: Company accounts, Edison Investment Research

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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