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Market capitalisation
GBP1,320m
Research: TMT
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.
4imprint Group |
Another year of strong growth |
Final results |
Media |
3 March 2020 |
Share price performance
Business description
Next events
Analysts
4imprint Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
Research: Oil & Gas
Canacol Energy has provided updated production for 2019–20, capex guidance for 2020 and its natural gas reserves at year-end 2019. Management expects production for 2020 to be relatively in line with realised average sales for December 2019 at c 205mmscfd and capex for the year at c US$114m. Capex will cover 12 wells across exploration, appraisal and development activities. The investment will contribute to Canacol’s reserve replacement and growth strategy and aims to expand its capacity to serve Colombia’s increasing gas needs. Natural gas 2P reserves increased by 12% and now stand at c 624bcf. Management is also currently working on the execution of a gas sales agreement (GSA) for an additional gas export route towards Medellin to add 100mmscfd of sales capacity by the end of 2023. Our 2P + risked exploration NAV has increased by 13% to C$7.16/share, reflecting the updated 2P reserve book.
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