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Last close As at 02/06/2023
GBP47.00
▲ 95.00 (2.06%)
Market capitalisation
GBP1,320m
Research: TMT
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.
4imprint Group |
Thaw in progress |
Trading update |
Media |
22 June 2020 |
Share price performance
Business description
Next events
Analyst
4imprint Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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 |
% 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
|
|
Research: TMT
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