IG Design has had a very good second half trading and has issued a year-end update indicating that numbers will exceed market estimates. We have lifted our FY17 and FY18 numbers by 8-10% at the pre-tax and EPS levels, following an 11% uplift to earnings with the interims. Particularly notable is the comment on strong cash flow, with the group reaching its target of average leverage less than 2.5x EBITDA two years ahead of plan. With the earnings and cash flow momentum, strong balance sheet and progressive dividend, there is good potential for further share price upside.
IG Design Group |
Outperformance in the bag |
Trading update |
Care & household goods |
24 March 2017 |
Share price performance
Business description
Next events
Analysts
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IG Design has had a very good second half trading and has issued a year-end update indicating that numbers will exceed market estimates. We have lifted our FY17 and FY18 numbers by 8-10% at the pre-tax and EPS levels, following an 11% uplift to earnings with the interims. Particularly notable is the comment on strong cash flow, with the group reaching its target of average leverage less than 2.5x EBITDA two years ahead of plan. With the earnings and cash flow momentum, strong balance sheet and progressive dividend, there is good potential for further share price upside.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/15 |
229.0 |
9.6 |
11.8 |
1.0 |
22.4 |
0.4 |
03/16 |
237.0 |
11.1 |
13.5 |
2.5 |
19.6 |
0.9 |
03/17e |
305.0 |
16.0 |
17.5 |
4.0 |
15.1 |
1.5 |
03/18e |
325.8 |
18.1 |
19.3 |
5.0 |
13.7 |
1.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Progress driven by US and Continental Europe
US progress, both organic and with the integration of Lang, is very encouraging and gives good momentum into the new financial year. Market opportunities are substantial as the group addresses new segments, such as the drug stores, and widens product categories. A shift in the Australian client base, disclosed earlier, will have restrained short-term profits but should boost margins in future periods. The UK, despite currency headwinds, is also broadening its market offer and internal reorganisation will help drive efficiency. The continental European business’s top line is growing well helped by customer expansion, with consequent efficiency gains boosted further by internal initiatives.
Cash converter
Our reports were once focused mainly on debt management (the group was 100% geared as recently as FY10). With the strong cash generation indicated in the update, we now expect the group to have ended its financial year with a very modest net debt position (£1.2m), down from the £10m we had previously forecast, and moving into net cash by end FY18. The half year will inevitably show a substantial number as the group has considerable working capital requirements. Peak net debt (normally end October, early November) will continue to rise as the business grows, hence the target focus being on average leverage.
Valuation: DCF implies further upside
The share price now recognises the group’s transformation from an indebted manufacturer in deflation-prone commodity markets into a confident, global, design-led, efficient partnership supplier to retail channels. However, a reverse DCF shows that the current share price assumes that either there is no medium-term growth or that EBITDA margins will fall. Given that the latter have been in a tight range of 6.8% to 7.4% for the last five years, even a modest growth assumption of 2% beyond the forecast period would indicate a share price of 308p. The strong cash flow generation and large step-up in dividend reinforce the positive outlook.
Exhibit 1: Financial summary
2014 |
2015 |
2016 |
2017e |
2018e |
|||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
224,462 |
229,025 |
236,950 |
305,000 |
325,750 |
Cost of Sales |
(185,244) |
(189,048) |
(193,552) |
(248,575) |
(265,487) |
||
Gross Profit |
39,218 |
39,977 |
43,398 |
56,425 |
60,264 |
||
EBITDA |
|
|
16,352 |
16,227 |
16,505 |
21,500 |
23,950 |
Operating Profit (before amort and except) |
|
11,320 |
11,692 |
12,909 |
17,400 |
19,500 |
|
Intangible Amortisation |
(576) |
(428) |
(285) |
(500) |
(500) |
||
Exceptionals |
(2,298) |
(1,235) |
0 |
(800) |
(400) |
||
Share-based payments |
(82) |
(623) |
(908) |
(2,000) |
(1,700) |
||
Operating Profit |
8,364 |
9,406 |
11,716 |
14,100 |
16,900 |
||
Net Interest |
(3,177) |
(2,726) |
(2,763) |
(1,400) |
(1,400) |
||
Profit Before Tax (norm) |
|
|
8,143 |
9,589 |
11,054 |
16,000 |
18,100 |
Profit Before Tax (FRS 3) |
|
|
5,269 |
7,303 |
9,861 |
14,700 |
17,200 |
Tax |
(1,582) |
(1,346) |
(2,219) |
(3,810) |
(4,927) |
||
Profit After Tax (norm) |
6,643 |
8,243 |
8,835 |
12,190 |
13,173 |
||
Profit After Tax (FRS 3) |
3,687 |
5,957 |
7,642 |
10,890 |
12,273 |
||
Average Number of Shares Outstanding (m) |
57.5 |
58.1 |
59.3 |
61.6 |
62.6 |
||
EPS - normalised (p) |
|
|
9.5 |
12.3 |
13.9 |
17.8 |
19.7 |
EPS - normalised fully diluted (p) |
|
|
9.2 |
11.8 |
13.5 |
17.5 |
19.3 |
EPS - (IFRS) (p) |
|
|
5.2 |
9.7 |
12.2 |
16.7 |
18.6 |
Dividend per share (p) |
0.0 |
1.0 |
2.5 |
4.0 |
5.0 |
||
Gross Margin (%) |
17.5 |
17.5 |
18.3 |
18.5 |
18.5 |
||
EBITDA Margin (%) |
7.3 |
7.1 |
7.0 |
7.0 |
7.4 |
||
Operating Margin (before GW and except.) (%) |
5.0 |
5.1 |
5.4 |
5.7 |
6.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
67,664 |
65,688 |
66,722 |
71,609 |
78,659 |
Intangible Assets |
31,950 |
31,692 |
32,236 |
33,450 |
32,950 |
||
Tangible Assets |
35,714 |
33,996 |
34,486 |
38,159 |
45,709 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
76,261 |
71,312 |
75,791 |
93,237 |
98,733 |
Stocks |
48,460 |
46,162 |
46,006 |
56,257 |
60,085 |
||
Debtors |
19,690 |
22,304 |
21,405 |
28,930 |
30,898 |
||
Cash |
8,111 |
2,846 |
8,380 |
8,050 |
7,750 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(51,965) |
(45,722) |
(48,331) |
(54,157) |
(56,222) |
Creditors |
(39,139) |
(39,982) |
(42,765) |
(52,407) |
(55,972) |
||
Short term borrowings |
(12,826) |
(5,740) |
(5,566) |
(1,750) |
(250) |
||
Long Term Liabilities |
|
|
(34,799) |
(28,694) |
(22,810) |
(11,856) |
(9,356) |
Long term borrowings |
(32,232) |
(26,479) |
(20,297) |
(7,500) |
(5,000) |
||
Other long term liabilities |
(2,567) |
(2,215) |
(2,513) |
(4,356) |
(4,356) |
||
Net Assets |
|
|
57,161 |
62,584 |
71,372 |
98,833 |
111,814 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
13,724 |
17,851 |
20,744 |
27,500 |
24,800 |
Net Interest |
(3,221) |
(2,775) |
(1,961) |
(1,400) |
(1,400) |
||
Tax |
(60) |
(1,263) |
(1,797) |
(3,415) |
(4,569) |
||
Capex |
(5,291) |
(2,100) |
(3,191) |
(6,000) |
(12,000) |
||
Acquisitions/disposals |
140 |
(1,451) |
0 |
(2,794) |
0 |
||
Financing/Other |
1,225 |
(1,347) |
74 |
5,086 |
0 |
||
Dividends |
(1,014) |
(829) |
(1,032) |
(2,672) |
(3,141) |
||
Net Cash Flow |
5,503 |
8,086 |
12,837 |
16,306 |
3,690 |
||
Opening net debt/(cash) |
|
|
42,138 |
36,947 |
29,373 |
17,483 |
1,200 |
HP finance leases initiated |
296 |
0 |
0 |
0 |
0 |
||
Other |
(608) |
(512) |
(947) |
(23) |
10 |
||
Closing net debt/(cash) |
|
|
36,947 |
29,373 |
17,483 |
1,200 |
(2,500) |
Source: Company accounts, Edison Investment Research
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Prima BioMed has presented encouraging early signs of efficacy from the TACTI-mel trial of IMP321 in combination with Keytruda, with one of the six melanoma patients in the first (1mg/kg) cohort experiencing a complete response. Recruitment in the second cohort is complete and the final cohort is expected to be fully recruited by Q317. Preliminary efficacy data from the 15-patient, run-in phase of the AIPAC breast cancer study are expected mid-year (recruitment in the 226-patient Phase IIb component is ongoing). Our valuation is unchanged at $192m ($9.24 per ADR).