IG Design Group PLC (LON: IGR) – Lifted Dividend on Robust Start to New Fiscal Year

IG Design Group PLC (LON: IGR) is a FTSE AIM 100 Index listed Company, which designs, innovates, and manufactures products related to Gift Packaging, Craft & Creative Play, Celebrations, Stationery, and Gifting. The Group was founded in 1979 when Scandinavian Design came into existence to manufacture and supply gift wrap to retail and wholesale customers. Post attaining a rapid growth, the Group rebranded the business as International Greetings in 1989 to reflect the international expansion. Through organic and acquisitive growth, the Group has transformed into the IG Design Group, representing a diverse Group of companies operating across multiple regions, seasons, categories, and brands. Presently, it serves over 11,000 customers in more than 210,000 stores across the world, with prominent operations in Europe, Asia, UK, Australia, and the Americas.


(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

Over the past decades, the global gift industry has expanded the customer base with innovative products at attractive prices. As per the Grand view research, the global gift-wrapping market was valued around US$16.15 billion in 2019, and it is projected to reach US$24.85 billion by 2025, representing a compounded annual growth rate of 7.4% from 2019 to 2025.

The increased penetration of e-commerce in the gifting world has emerged as a vital factor for driving the demand for gift wrapping paper. Moreover, e-commerce majors such as Amazon, Alibaba, and Snapdeal are expected to fuel the demand for gift wrapping paper. Also, the rise in purchasing power surging the demand for elegant and customised gifting options.

Growth Prospects and Risk Assessment

The Group transforms paper into products that help the world celebrate life’s special occasions. It has a complete end-to-end service from design to distribution. It enjoys considerable market presence around the world by serving in more than 80 countries through over 210,000 stores. The Company’s focus on the strategy 'Working with the winners' continues to deliver organic revenue growth in key markets. Further, the Group has completed the transformational acquisition of CSS Industries in March 2020, which has already delivered $5 million of annualised savings to date with more to come in FY21. The Group is now fully operational as it responded quickly to the Covid-19 crisis with the effective cash management plan.

The Group continues to implement the strategy and business model to deliver returns. There remained a significant pipeline of business opportunity for the Company. It is focused on three strategic drivers, i.e. Working with the winners, Design & innovation and Efficiency & scale, which resulted in revenue growth in key markets such as the UK and the US. The Group has a strong geographic reach, which helps them to mitigate risks easily. IG Design Group is identified as leading designers, innovator and manufacturer of Craft & Creative Play, Gift Packaging, Stationery, Celebrations and related product categories, globally. The Group is actively seeking acquisitions for strong organic revenue and to achieve growth synergies.

However, there are certain risk and uncertainties, which can impact business performance and growth trajectory. The failure to attain the expected synergies from acquisition integration projects can lead to a massive restructuring cost. Moreover, the emerging risk of Covid-19 has been affecting economic activities, and it is posing an additional operating cost for the safe management of operations. Also, the dispute between the US and China can significantly impact the tariff costs. The overdependency on top 10 customer poses a risk to the business revenue. Moreover, during the uncertain economic conditions, the Company needs to regularly evaluate the debtors and credit risk profiles of key customers. The Company is also exposed to market risks such as  interest rates, equity prices, foreign exchange rates as these could affect income or the value of holdings of financial instruments. 

Capabilities of Business Divisions 

The Group has one material business activity being the manufacturer and distributor of products related to Celebration, Craft & creative play, Stationery, and Gifting. The resources are allocated geographically four major countries/ regions – UK, Europe, USA, and Australia.

In FY20, the Company has seen growth in both Revenue and Adjusted operating profit which increased to £33.4 million (2019: £32.6 million).


(Source: Annual Report, Company Website) 

Synopsis of Recent Developments

4 March 2020: The Company announced the completion of the acquisition of CSS Industries, Inc. The acquisition of CSS Industries will nearly double the size of US operations. In FY20, revenue from the Americas segment grew significantly by 23% year-on-year to $355.9 million, which included $19.9 million of revenues from CSS.

21 January 2020: The Group raised £120.0 million by issuing 9,403,720 Ordinary Shares. The placing shares represented approximately 21.9% of the Company's existing outstanding issued share capital. The funds were raised to carry out the acquisition of CSS Industries and strengthen the balance sheet for wider growth strategy.

Measuring Non-Financial Key Performance Indicators

In FY19, the Company reported a significant increase in revenue from the top 10 customers, while the mass and discount retailers remained the focus of the sales channel.


(Source: Presentation, Company Website)

Top Shareholders Statistics

Update on Trading Performance for Q1 FY2021 (released on 28 July 2020)

The Group started FY2021 with strong momentum across all regions against Covid-19 forecasts. Driven by the benefits of CSS, acquired in March 2020, the revenues stood higher on a reported basis versus last year data. The revenue excluding CSS on life-for-like basis stood ahead of management expectations but declined by 27.7% on a year-on-year basis, due to the impact of Covid-19. CSS revenues benefitted from increased demand for Craft product and were ahead of updated forecasts but down by 11.7% on a year-on- year basis. The Group’s Adjusted profit before tax was benefitted from effective cost management and sales margin mix, despite lower revenues on a like-for-like basis. The Net Cash position as on 30 June 2020, stood significantly ahead of expectations of management and $63 million better than last year data, reflecting a focus on cash management in Q1. The Group has a strong order of pipeline with over $500 million and is ahead of last year. The revenue stood ahead of FY2020, driven by CSS acquisition, while revenue will decline from pre-Covid-19 expectations for FY2021. Based on Q1 FY2021 performance, the management is optimistic about the outlook for FY2021 and FY2022.

Operational Highlights for Financial Year 2020 

The Group paid attention toDesign and Innovation and was focussed on Working with the winners, which delivered organic revenue growth in major markets. The Group launched Seasonal Events products and Creative Play products in the US market, and sustainable product ranges in the UK market. The Group fully integrated manufacturing facilities based in the US into Memphis, with the successful commissioning of new printing press despite the operational challenges due to US-China trade dispute and integration. The Group made the acquisition of CSS (CSS Industries Inc) in the United States in March 2020, and driven synergies resulted in an annualised savings of $5 million to date and more to come in FY2021. The Group quickly made a response to Covid-19 crisis and is fully operational despite the initial challenges.

Financial Highlights – Improved Revenue For FY2020 (31 March 2020)


(Source: Annual Report, Company Website)
 
For the financial year ending 31 March 2020, driven by the effect of sales from CSS for one month, the revenue increased by 10% to £494.2 million (FY2019: £448.4 million). The adjusted PBT (profit before tax) remained flat at £29.1 million in FY2020 (FY2019: £30.3 million), the adjusted profit before tax  reduced by £0.7 million on L-F-L basis (like-for-like) with the adoption of IFRS16. The adjusted diluted earnings per share declined to 26.9 pence in FY2020 (FY2019: 29.1 pence), reflecting the higher diluted number of shares in Q4 FY2020. Due to challenges faced and increased disruption resulted in increased number and size of adjusting items during the period, the PBT (profit before tax) declined to £0.3 million in FY2020 (FY2019: £17.3 million). The diluted earnings per share  stood at 16.9 pence in the financial year 2020 (FY2019: 15.9 pence), reflecting the benefit of changes in the US tax rules. The net cash balance in FY2020 stood at £42.3 million (FY2019: £17.1 million). The Groups’ average leverage stood at 0.9 times in FY2020 (FY2019: 1.3 times), reflecting a focus on cash management in FY2020.

Financial Ratios – Improved Profitability versus H1 FY2019 Period

Reported profitability metrics for the first half of the financial year 2020 were improved as compared with the last year data for the same period. The Group managed to show decent profitability and reflecting better control over expenses. IG Design Group Plc has delivered a decent return for the shareholders as return on equity of 7.3% was higher as compared to the industry median. On the liquidity front, IG Design Group Plc’s current ratio was lower than the industry median of 3.52,but the Group has sufficient current assets to meet short-term obligations. The Group managed to increase the liquidity as against last year comparatives. On leverage front, the debt-equity ratio was 1.36x, which was higher as compared to the industry median, reflecting that the Company is more leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 11 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On August 11, 2020, at the time of writing (before the market close, at 11:17 AM GMT+1), IG Design Group Plc shares were trading at GBX 523.51, down by 0.28% against the previous day closing price. Stock 52 week High and Low were GBX 798.00 and GBX 300.00, respectively.

Bullish Technical Indicators

From the technical standpoint, shares were trading above the short-term support level of 10-day, 20-day and 30-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

IG Design Group Plc Vs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, IG Design Group Plc share price has delivered 264.58 per cent return as compared to 39.48 per cent return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology

Enterprise Value/Sales Approach (NTM)

To compare IG Design Group Plc with peers, EV/NTM Sales multiple has been used. The peers are MJ Gleeson Plc (EV/NTM Sales was 1.75), McCarthy & Stone Plc (EV/NTM Sales was 0.73), Portmeirion Group Plc (EV/NTM Sales was 0.67), Springfield Properties Plc (EV/NTM Sales was 0.63) and Walker Greenbank Plc (EV/NTM Sales was 0.38). The Average of EV/NTM Sales of the company’s peers was 0.83x (approx.).

Business Outlook Scenario

In FY20, the Group has delivered decent revenue growth and reduced average leverage (below 1x) despite the unprecedented trade tariffs and Covid-19 pandemic conditions. It reflects the adaptability, resilience, and enterprising nature of the business. Moreover, it has completed the largest-ever acquisition, which shall yield exciting opportunities for future expansion. Whilst the period ahead remains uncertain, the order book exceeded $500 million year-on-year, which underpins the resilience and ability to return to significant growth. Furthermore, the balance sheet is bolstered post the incremental equity raise in January 2020, and with an enhanced focus on cash management. Therefore, the revenue for FY21 is expected to remain ahead of FY20 with the full-year effect of CSS acquisition.


(Source: Presentation, Company Website)

The Group entered the financial year 2021 with strong momentum and achieved growth in revenue and adjusted profit before tax above the market expectations. The operations were benefited by the acquisition of CSS as it resulted in revenue growth and with improvement in net cash position. The adjusted profit before tax in Q1 FY2021 was benefited from effective cost management and sales margin mix. After the acquisition of CSS, the Group witnessed an increase in banking facilities. The Board has recommended a final dividend for 5.75 pence, which reflect the strong financial position and shows commitment towards progressive dividend policy.

Over the course of 5 years (FY15 – FY20), the company’s revenue surged from GBP 229.03 million in FY15 to GBP 494.20 million in FY20. Compounded annual growth rate (CAGR) stood at 16.63 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 519.20 (as on 11 August 2020, before the market close at 12:15 PM GMT+1), with lower double-digit upside potential based on 0.83x EV/NTM Sales (approx.) on FY21E sales (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters. 
*Dividend Yield may vary as per the stock price movement.

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