IG Design Group Plc (LON: IGR): Strong FY21 outlook and efficient cost management.

IG Design Group is an FTSE AIM 100 listed Company, engaged in designing, manufacturing and innovation of products related to Craft, Gift Packaging, Celebrations and Stationery. The Company was incorporated in 1979, with Scandinavian Design came into existence to manufacture and supply gift wrap to retail and wholesale customers.

The Group had rebranded its business as International Greetings in 1989 to reflect the international expansion. In April 2021, the Company will release the post-close trading update.

(Source: Company website)

Growth Prospects and Risk Assessment

IGR would continue to develop sustainable product lines focusing on innovation in its design. The acquisition of CSS had performed well and delivered several synergies resulted in an increase in the Group’s adjusted profit before tax during the first nine months of FY21.

(Source: Company presentation)

The Company had managed to operate all its regional businesses and manufacturing units despite Covid-19 restrictions, with its primary focus on optimizing trading opportunities. Moreover, the Brexit end had not created any operational headwind so far.

  

However, the performance can be significantly impacted by principal risk of increasing frequency of cyber hacks, sustainability, Health & Safety concerns, supply chain integrity, liquidity and treasury management, customer default and acquisition risk. The Group is also exposed to Covid-19 related risk and economic uncertainty regarding changes in the global economy.

Industry Outlook Dynamics

Based on the recent report by Allied Market Research, the market size of the global gift cards industry was USD 619.25 billion in 2019. It is projected to grow at a CAGR of 16.2% for the period from 2020 to 2027 and reach USD 2,076.51 billion by 2027. The demand for gift cards had surged since the emergence of Covid-19 pandemic due to reduced usage of cash payments in the market. The rapid growth in digital transformation and increasing technological innovation are boosting the industry.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of IG Design Group Plc.

Recent Developments

On 4 January 2021: The Company has appointed Greg Hodder as an Independent Non-Executive Director, with an immediate effect.

A Glimpse of Business Segments

(Source: Company Website)

Trading Update (for the nine-month period ended 31 December 2020, as on 25 January 2021)

• The Company generated a reported revenue ((including $242 million from CSS Industries Inc.) of approximately USD 737 million, which was up by 35% year-on-year. However, excluding CSS, the Group revenues decreased by 9.2% year-on-year, driven by the impact of Covid-19.
• The Company saw a decent performance in International segment (mainly in Europe) and good growth in the Americas (due to the CSS acquisition).
• For the first time in the nine-month period to 31 December 2020, the Group's Adjusted profit before tax (including CSS) increased as compared to the corresponding period of the previous year, with good profit growth in Americas and International (on a year-on-year basis).
• On a year-on-year basis, the Company has shown a reduction in net debt at USD 26.3 million as of 31 December 2020, compared with the previous year.
• During the period, it has a strong focus on cash management, mainly in all aspects of working capital.
• Over the festive period, the retail customers have stated strong sell-through rates across all the regions, mainly in Christmas product categories.
• It also saw strong performance in e-commerce-based activities, with further developments anticipated in the new financial year.
• Despite the associated macro-economic challenges, the demand for IGR's product offering stays robust.
• Further, the average leverage for FY21 is expected to be below 0.5x Adjusted EBITDA.
• Overall, in the nine months to 31 December 2020, the Company has given stronger performance than expected while the FY21 outlook stays in line with current market expectations.

Financial and Operational Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 24 November 2020)

(Source: Company Website)

• The Company had a good start to the financial year 2021, with an increase in revenue of 41% year-on-year and adjusted profit before tax of 16% year-on-year.
• In H1 FY21, the growth was driven by the CSS acquisition, with the negative impact of Covid-19 across the Group, mainly in the first quarter of 2021.
• The Company has shown a strong first half cash management performance, with average leverage of 0.2 times and an improvement in the net debt of US$82.9 million.
• Moreover, CSS has delivered a strong performance in H1 FY21 with revenues broadly flat on a year-on-year basis.
• The Company witnessed seasonal debt levels significantly below the prior year.
• Meanwhile, CSS acquisition has increased the US dollar revenues to more than 70% of the Group.
• The Company also declared an interim dividend of 3 pence per share, which shows strong future pipeline.
• Orderbook is more than 80% of full-year revenue forecasts, which was at a higher level than the last year.

Financial Ratios

Share Price Performance Analysis

On 16 February 2021, at the time of writing (before the market close, at 9:50 AM GMT), IG Design Group Plc shares were trading at GBX 490.00, down by 0.61% against the previous day closing price. Stock 52-week High was GBX 766.00, and Low was GBX 300.00, respectively.

From a technical standpoint, 14-day RSI (27.30) supports the upside potential.

In the last five years, IG Design Group Plc’s stock price has delivered ~227.27% return as compared to ~96.52% return of FTSE AIM 100 Index and a ~9.79% return of FTSE All-Share Household Goods index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

IGR had delivered resilient business performance during the first nine months of FY21. Furthermore, the sales in the Christmas festive season had performed on the expected lines, particularly the sales across the best sellers such as gift wrap, Christmas Décor, and creative play. The Company had demonstrated seasonal debt levels substantially lower than its FY20 levels and anticipated average leverage to remain below 0.5x for FY21. IGR had paid an interim dividend of 3 pence per share on 15 January 2021, illustrating long term confidence in its strong future pipeline. Meanwhile, the acquisition of CSS had made significant contributions, and it had increased the US dollar revenues to more than 70% of the total revenue. Overall, IGR is well-positioned to deliver consistent growth for financial year FY22 and beyond.

Considering the strong order book, increase in reported revenue in 9M FY21, reduction in net debt, stronger performance from the enlarged e-commerce based activities, sustainable business model, strong retail customers growth across all territories, encouraging sales levels, sturdy signs of progress, robust demand, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on IG Design Group Plc at the current price of GBX 490.00 (as on 16 February 2021, before the market close at 9:50 AM GMT), with lower-double digit upside potential based on 24.74x Price/NTM Earnings (approx.) on FY21E earnings per share (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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