IGR ON THE RECOVERY ROAD - 30/04/23

With downbeat sentiment having continued to prevail across the UK stock market in recent months, particularly in the small cap space, it comes as no surprise to see an ever-increasing number of companies being acquired on the cheap.

Value is certainly evident, as can be seen by a number of buy-outs at seemingly knock down prices, along with some companies increasingly looking to shift to alternative stock markets.

That said, rather than throw in the towel, like others, I have continued to look for potential undervalued situations that in time will provide for some really decent uplift.

One company that I recently bought into at £1.12p is IG Design Group, (IGR) which appears to look ripe as a recovery play with potentially rewarding medium-long term upside.  

The company is the world’s largest producer of celebration products that takes in the likes of greeting cards, gift wrapping, Christmas crackers along with partyware and associated products.

Within its offerings, the company both designs and manufactures its own products, where it distributes an extensive range across the globe, working closely with retailers both large and small.  

Indeed, IGR’s products are sold in more than 200k retail outlets across the world which takes in more than 80 countries and which last year (FY 2023) accounted for revenue of £890m.

Despite being a major player in a vast market, IGR has perhaps not surprisingly endured some tough years of late, following the pandemic and the subsequent difficult economic backdrop that has in part conspired to impact upon the business.

Back in January of 2020 the shares sat just shy of £8.00 each, before embarking on a one-way trip southwards as profits evaporated and slumped into losses, whilst the dividend was also axed as debt rose uncomfortably high.

Whilst that may suggest IGR, despite its celebration theme, is perhaps one best to avoid, particularly in light of the ongoing sluggish economic growth, I do believe there are reasons to be bullish on the prospects here.

Indeed, the tide does appear to be turning, with a new and highly focused management team having already slashed debt and got to grips with a number of underlying issues that were impacting the business.

Earlier this month I caught up with both the CEO Paul Bal and CFO Rohan Cummings for an introductory call on the business and management plans to execute on its recovery strategy.

Bal, who has extensive experience, joined the company in the spring of 2022, whilst Cummings came on board as recently as July of last year following a successful stint at Devro amongst others.

Along with a refresh of the board, a change in strategy has also been key here, being driven by Bal, who went into some detail for me on the path being pursued on which to deliver shareholder returns.

Speaking of the driver and philosophy behind the plans to execute, the CEO said, “ours is a little bit different to that of our predecessors who were really wanting this to become a billion-dollar business”.

That vision had seen the previous regime embarking on the acquisition trail, which resulted in something of a disjointed operation that ultimately failed to deliver and arguably led to a lack of credibility with the wider investor community.

Bal, says for him and the team, the aspiration is to build a resilient business, as he explained the meaning of that and the reasoning behind that aim, on the back of a disappointing past.

“If you look back at the history of this business when it was first set up in 1979, it has gone through two major periods of dysfunction, which resulted in a significant drop in the share price. We have got to break that cycle which is why building resilience is so important.”

Bal believes that both he and Cummings are the right people to deliver on this front, being experienced and professionally trained managers, where to date, things appear to be shaping up well.

Since coming on board, the CEO has quickly got to grips with the various issues that have plagued the operations and held the business back as he explained. “What brought down this business was an over complexity and really not being able to see the wood for the trees, where as a result of that, there were inherent weaknesses in the financial model.”

Expanding on the more recent issues across IGR, Bal said that having actually gone through Covid quite well, what happened in the summer of 2021 was that the business became seriously exposed.

As normality resumed in the wake of the pandemic, supply chains struggled to catch up and this in turn saw freight costs increasing vastly, which in the case of IGR erased already thin margins.

Bal added that the reason the business didn’t react to such a major issue was very much down to the complexity of its operations.

Although the more straightforward and less complex European arms proved proactive on this front, the more fragmented US businesses which made up around 70% of total revenue were slow to move.

The philosophy was also inherently against the business overcoming the various issues, with an inability to act or move quickly to address things coming down the road.

That mindset has shifted considerably with closer attention to detail and other measures, which includes a departure from chasing numbers merely for the sake of it.

Commenting, Bal said, “the important thing to us is that the model is resilient and so consequently, you will see an improvement in the margin and a reduction in working capital which then translates into more cash”.  

The stronger model also means simplifying the operations in the US, where the CEO added that the previous management team had been right to target the region because of the high per-capita spend per user there. Going further though, he said, “what they hadn’t done was to integrate those businesses properly and make some of the tough decisions that were required.”

That inability actually impacted upon the company in a number of ways, which included, as Bal explained, the unnecessary operating of several different trading contracts with one major customer.

With that, including the likes of different teams, differing offerings and alternative supply chains along with pricing structure, the chances of really leveraging the scale of what was created proved extremely difficult.    

With such issues having been and continuing to be addressed, IGR is already in a better place and should be able to further demonstrate improved margins moving forward.

Having now completed two years in a three-year turnaround plan and delivered on what had been set out, Bal said that the next step is to return the business to growth. “That was kick started in Autumn of last year” he added “and now we are looking at how we trade differently across the business, which sees us taking what were several different businesses in the US and making those a single enterprise which is allowing a more constructed architecture providing a more unified approach to our customers.”

Another key aspect of the turnaround strategy is that of design, which up until recently had been the big focus of the business.

Whilst acknowledging the importance of this element of the operations, Bal added that they can’t just be led by design, they have also got to have a stronger muscle when it comes to other areas of the products.

This should result in more differentiated categories feeding through moving forwards, which in turn, should result in a differentiated margin.  

Bal explained that in the past there had been a rush to the bottom and an accepted need to attempt to compete with cheaper imports supplied by China. Whilst that was happening, alternative propositions with unique design or more personal products were being supplied by other disruptive operators.

Bal said, “they aren’t doing anything we can’t, so one of the things as we now look forwards, is to learn from the past and the way we handle things and move into more profitable growth.”

Self-help has certainly aided IGR to its current position, but the team are now looking to elevate the products and its many established relationships into an organic growth mode that should deliver tangible results.

This morning, further evidence of the turnaround has been on show, with a positive pre-close Trading Update to the market which has seen an outperformance on market guidance.

Although revenue declined as expected, margin recovery, cash generation and adjusted pre-tax profits were collectively in very positive territory and sees the company firmly on track for a resumption of dividend payments in the current financial year.

As most watchers of the company will be aware, Christmas is understandably key to the business and the overall performance, although Bal went into a little more detail for me.

“Our job is not just to take a product from here to there to make sure it is ready in time for the Christmas period which was what was always thought before. The job doesn’t actually end until the product has gone to the consumer, it has been used and there is then a repeat order. Our job is also not done in my view, unless we have extracted as much value as we can.”

Bal is also keen to talk of growth resumption which is an overriding factor in the forward plan where he commented, “in terms of markets I feel the bigger opportunities for growth will now come from Europe rather than the US.” He added that in the US self help will prevail and put the business platform back into a growth model and the business will grow. But, going on he added, “the US market is quite a consolidated competitive one, yes, it is a rich market, but it also has some challenges of overcapacity across retail.

Over in Europe, I see opportunities, because that market is actually very fragmented and our competitors there are typically smaller private companies, particularly compared to the US.”

Bal told me that in the coming months, a return to profitable growth in the US and a return to paying a dividend are focal points for the management team.

It was also added that if they are in the place they want to be by the end of March 2025, then it should be reflected in a share price that doesn’t start with a one.

Having come through a period of freight risk and some retail concerns in the US, Bal sounds optimistic on the future and further progress being delivered on the back of increasing resilience.

In terms of the overall market and potential disruptors, I enquired as to whether the likes of Moonpig feature much in the way of competition. Bal said that he was well aware of Moonpig long before joining IGR, where he commented, “there is a popular misconception around the role of cards in our business, as we are not actually a big card player, as cards is a mid-single digit percentage of sales.”

The area of e-commerce is however an area that Bal said that they are keen to explore, as although there are areas within the business which it wouldn’t benefit, they have identified others where potentially they very much would.

As an example, the CEO speaks of one particular aspect of the IGR operations, where he commented, “one of our most successful businesses is a patterns business called simplicity, which is the biggest producer of clothes patterns and was the saving grace of the business during Covid.”

Via the website simplicity.com clothing patterns can be purchased, along with being extensively available in major retail outlets, which the CEO says is a huge market across the US for many reasons. Simplicity is the number one player, which also sees it amongst others, holding the licence to the vogue brand.

That business is, said Bal, an obvious choice for e-commerce investment with the options on patterns being incredible providing potential to move beyond the already extensive physical footprint.

As a world leader in its field, it is not surprising to see IGR working with the major blue chip retail players, which sees Walmart as its largest global customer accounting for around a fifth of the business.

That US based relationship is a long established one, whilst in the UK, Tesco features as its largest customer where that relationship has been in place for some forty years.

Aside from those and other well-known names, IGR is also active across more specialist retailers along with the discounters, providing a wide and extensive mix.

Bal is keen to further emphasise that the lower or cheaper end of the market isn’t an area to chase, as it is impossible or not worthwhile competing with China, concluding that buying scale is to be avoided.

He also said that they aren’t afraid to walk away from conversations on business and contracts if the margins aren’t right and this has actually played out well, as some of those customers have subsequently come back to re-engage.

In the UK, already working with Tesco, Sainsbury, Aldi and Ocado, Bal said that they are also now back with John Lewis which arguably in conjunction with other positives, provides for a glimpse of the strategy to strengthen and reposition the business.

Despite enjoying extensive exposure, Bal and his team are aware of the need for product differentiation, particularly in a crowded market and this is another aspect that is being addressed and pursued.

Following the update today, broker Canaccord upped its full year 2024 numbers, with adjusted PBT moving to$25.9m against the previous $20.5m on sales of $800m.

In terms of the current financial year 2025, the broker comments, “Our unchanged FY25E forecasts are in line with IGR’s growth plan, which has been reiterated today, and we forecast an adj. EBIT margin of 5.0% and adj. PBT of $36.0m (+39% yoy), surpassing IGR's previous record adj. PBT performance of c.$35.8m in FY19. We now forecast further cash generation to $105m (71% of current MV), providing scope for the reinstatement of dividends and potentially additional shareholder returns thereafter.”

The shares as I write, are up some 34% this morning at £1.63p, but with a firm focus on margins and growth on the back recovering markets along with dividends returning, I am hopeful that IGR has someway to go over the next few years.