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.
IG Design Group |
Australian cards on the table |
Acquisition |
Care & household goods |
21 September 2017 |
Share price performance
Business description
Next events
Analysts
IG Design Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
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