IG Design’s full-year update paints a brighter picture

“Investors could have been forgiven for fearing the worst after last December’s profit warning and layoffs at Etsy, where the American firm blamed a weak crafting market, so the relief that is greeting IG Design’s full-year trading update is quite understandable,” says AJ Bell investment director Russ Mould.

“Shares in the greetings cards, crafting, gifts and gift-wrapping specialist are up sharply, thanks to chief executive Paul Bal’s assertion that profits for the year to March 2024 will beat expectations – despite a drop in sales – and that the AIM-quoted concern is on target to return to pre-pandemic underlying profit margin levels of 4.5% by the end of fiscal 2025.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, management guidance

“The 10% drop in full-year sales, to around $800 million, was pointed to alongside the autumn’s first-half results, when Mr Bal flagged a slow start to the festive season in America, a resumption of more normal, seasonal patterns post-pandemic and also the ongoing work to extricate IG Design from unprofitable contracts.

“Last June’s refinancing of the company’s debt gives IG Design plenty of time in which to effect its turnaround, the need for which lies in two acquisitions.

“The first was 2018’s purchase of the American business Impact Innovations, for an all-in cost of just under £100 million, and the second was 2020’s swoop for America’s CSS Industries for £90 million, including debt.

“Both deals broadened IG Design’s geographic reach, customer base and product range but they brought debt, an increased reliance on seasonal business at Thanksgiving and Christmas and exposure to retail giants such as Wal-Mart. While such sales relationships can be very helpful, given the route to market that they offer, they can bring challenges, too. IG Design outsources the majority of its product production and at a time of inflation and rising freight and input costs that leaves the firm as the meat in the sandwich between sub-suppliers on one side and price and margin-conscious retail buyers on the other.

“These challenges lay at the heart of IG Design’s profit warnings of October 2021 and January 2022 and a slump in the share price from a high near 800p in early 2020 to lows of less than a tenth of that in 2022.

“Even after the latest surge in the share price that leaves a lot of ground to recapture, but further progress in the underlying operating margin in 2025 should help to boost investors’ confidence, even if they will note with some concern the $5.5 million legal provision that will weigh on the stated results. IG Design continues to take legal advice.

Source: LSEG Datastream data. Company known as International Greetings until June 2016

“Even the 2025 target margin is not a particularly fat return on sales, so IG Design still has much work to do as it looks to recover from 2021’s woes, and it will be interesting to see if management discusses any potential return to the dividend list when the full-year results are released as that really would signal their confidence in the company’s future prospects.

“The company scrapped its final dividend in the fiscal year to March 2022 and has not made a payment since, although analysts have pencilled in a return to the dividend list for fiscal 2025.

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

“At least the skinny target margin is reflected in a lowly valuation, so if IG Design can reach that goal, or even exceed it, the shares could still look cheap.

“The £148 million market capitalisation compares to annual sales of around £640 million at current exchange rates, while the 156p share price could look tempting if earnings per share get anywhere near their 2020 peak of 16.9p and the dividend ever gets near to 8.75p a share again.”

These articles are for information purposes only and are not a personal recommendation or advice.