IG Design Group (IGR) released its full year results yesterday that came in slightly better than expected, demonstrating a continuation of the previously suggested turnaround.
The company, which is a major global player in its field, is focused on producing and distributing gift wrapping, celebration products and various associated items, where it supplies major retailers such as Walmart, Sainsbury and Tesco.
From an investment perspective, this has been a great ride for me thus far, having only bought in three months ago at £1.12p and where the shares now sit at £2.32p.
A 100% return in such a short space of time is something of a rarity, so for my part, it is most certainly welcome, particularly as there appears to be further upside ahead.
Although up again as I write, the shares may well tread water for now or even ease a touch in the near term, but having spoken once again with management and taken a close look at the three broker notes that have been released, I feel IGR is very much one worth sticking with.
As most people invested or interested in the stock will already have taken a look at the results, I’ll leave the numbers and forecasts until the end of this piece and launch straight into the online meeting I had with CEO Paul Bal and CFO Rohan Cummings .
(I caught up with them both for an introduction a few months back and the piece is here on the blog for anyone interested).
One aspect of the results release that I was keen to touch on, was the reference to a change of culture within the group, which has clearly played a part in the turnaround as an element of self-help measures.
Bal, expanded on this for me, where he commented “there are two aspects of this which are important, with the first being the internal culture as to how the group operates. Traditionally, this group was a whole load of stand-alone businesses, therefore it failed to really leverage and scale. It had built scale through M&A and its representations in all its markets, but it just wasn’t leveraged.
There wasn’t leverage at the front end where teams were busy competing with each other and all the way through to the back end, as they had a lack of integration along with multiple sourcing teams.”
This saw such individual teams operating in the likes of China that were actually tapping the same supplier, as opposed to functioning as a single entity to maximise the opportunities and the best price.
As a result, Bal says that the focus has very much been on ensuring that people talk and operate progressively across the group, where he added, “it isn't about reinventing the wheel and it's not just about the inefficiency of the process, it's about the market and pitching faster.”
As an example Bal said that about 18 months ago they launched some software that enabled all of their design teams to share every one of the groups designs in one place. This provides for leveraging designs to capture new, or improve on existing business, which has also brought about savings on time that ultimately drives the overall improved performance.
A second aspect of the culture change has been what the CEO describes as a bit more outward looking which has resulted in the moving away from being reliant on design and design led wins which had been the case for so long.
Explaining Bal said, “Whilst that strategy is fine in a transactional sense, it isn’t in terms of a strategic sense, in taking ownership of the category and taking that ownership conversation to the customer.”
The result is a close dialogue with that customer on how to take the brand forward together, which proves mutually beneficial in terms of driving scale and the delivery.
Of course, being in the business it is in, margins are never going to be something to shout about and in recent years these have been wafer thin, which obviously impacts on the investment case for some would-be investors.
The management team has, however, been firmly focused on getting these back to pre-covid levels and is very much making the desired progress. CFO Cummings, told me that there have been self-help initiatives that have brought about improvements in what have been testing times for any business.
These have included restructuring and streamlining exercises across the group and he sounded a positive note on the 2% margin improvement on the prior year, as he reaffirmed a commitment to get that up to 5% by the end of 2025.
Improved sourcing of its products is another aspect that has played a positive part too, where Cummings said that they have seen significant benefits which have offset some of the inflationary impacts.
Bal added that whereas it used to be all about the sales, the driven change of culture has resulted in the dynamics and importance of margins now being better understood. Expanding he said, “We are confident we can develop that margin opportunity and the further you go, the more the opportunities unlock themselves and we see that continuing.”
Another aspect worth touching on that was included in what was a very detailed set of results, was the reference to some sites being closed and sold off.
For further meat on the bones relating to this, the CEO was happy to fill me in. “There are two sites located in Pennsylvania in the USA and one site in Wales, in Merthyr Tydfil. Of the two in the US, one is a production site, the other is a distribution centre, where the Welsh site is a warehouse. The book value of these is $2m in aggregate, but we are hoping to achieve at least $10m in total and we are actively marketing those."
Also revealed in the results, was the closure of a factory in China which had been in the group since 2003.
This predominantly made crackers Bal said, which has seen an evolving market around it, which he added has resulted in management's recognition that IGR just wasn’t competitive.
In reality, third party manufacturers could produce far more competitively than they could, which with IGR’s renewed and successful approach to sourcing led to the decision to close the operation.
This, I was informed, should be completed by the end of the year which coincides with the end of the lease.
Having delivered very positive results it is now all about looking forward and continuing on the path of progress alongside a dividend reinstatement, which could potentially see something emerging at the Interim stage.
As a holder of the shares and wearing my investment hat, I pointed out that I, for one, would be happy to wait for a more meaningful full year payment.
Commenting on any dividend commencement, Bal said, “We have been pretty consistent on this, where we have said that we need a degree of confidence on the margin being rebuilt and secondly, we can see a route to growing the top line in a profitable way.
Therefore, I am envisaging that in the next twelve months we will be in a position to do that with dividends and yes, the two options are for waiting until the end of the year, or putting something in at the Interim and it is something I am keeping a very close eye on.
Of course, I would love to get a dividend out there for shareholders as soon as I can as a reward for their patience, as the last time we paid a dividend was nearly four years ago.”
With what is now clearly a business firmly in turnaround mode, the plan is to now grow the business, which despite obvious prevailing headwinds appears firmly on track.
Self help measures are fine to a degree, so it is good to hear that specific collaborations along with growth opportunities across Europe assisted by new initiatives will also play a part. Additionally, Bal speaks positively about the Smart Wrap offering which he said he believes could be a game changer.
The product is superior in every way and eliminates the frayed edging that is so often experienced on crowded shelves in a Supermarket environment. The early indication from existing customers has been very positive and the CEO added that he is very excited that they may well see new customers coming into IGR’s wrap business.
Canaccord, Liberum and Singer are all covering the stock, where the latter leads with the following comment.
“Management actions to simplify operations, drive efficiency and focus on profitable business have made significant advances in the 1st 2 years of its 3-year turnaround. This is evidenced in the margin and profit uplifts, and shift from avg. ND to net cash. Today’s update remains measured in terms of the backdrop, but is positive on the ongoing roadmap for profits and FCF as it starts to transition to growth. Confidence is growing in IGR’s ability to withstand economic and operational challenges, including higher freight costs, which should drive more re-rating."
Looking at the full year numbers reported (2024) we saw revenue of $800m with adjusted pre-tax profit of $25.9m giving EPS of 16.3c whilst net cash moved to $95.2m.
Looking ahead to the year now in play, Liberum, which has a £3.45p target price is looking for revenue of $821m which is expected to see adjusted PBT of $34.3m and EPS of 20.22c.
The broker also sees net cash improving to $102m, although Singer sees this as hitting $110m. All of the brokers mentioned are pointing to a reinstated dividend which varies accordingly, with Canaccord looking for 5c, whilst Singer opts for 7.8c.
With the shares standing on a forward PER of 12 which looks comfortable in what are testing times, IGR looks well placed to continue its recent momentum and any recovery in the wider economy could provide for a further boost.
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