IG Design pins hope on margin recovery plan

Gifting and stationery company IG Design’s (IGR) operating profit margin and share price were decimated by supply chain headwinds during the pandemic as costs increased materially in its key US market. But the share price has doubled over the past 12 months, with the market taking interest in a potential recovery story – although April’s trading update, detailing a goodwill writedown, took some of the shine off. In this context, management’s reaffirmation that it is aiming for margins to hit pre-pandemic levels again by the end of the 2025 financial year was an important one.

Still, there are signs that the recovery strategy is bearing fruit, judging by a better-than-expected rise in underlying profits and operating margin. However, an adjusted margin of 1.8 per cent still isn’t exactly world-beating.

A big part of the story is the ongoing restructuring of the business in the US, which contributes two-thirds of sales. A US sales fall of 10 per cent was driven by the exiting of unprofitable contracts and weaker volumes in the second half. International sales fell by 3 per cent, with adverse FX movements offsetting growth – European growth of 18 per cent was a standout.

The pivot to a statutory loss was impacted by the $29.1mn (£22.7mn) impairment of historic goodwill from UK and Asia acquisitions as the cash flow outflow weakened. Management pointed to ailing consumer demand in the UK in the final quarter. 

A stronger balance sheet supports the recovery narrative. The company has refinanced a $125mn banking facility, while net debt (including leases) fell by $40mn, year on year. 

Elsewhere, the order book came in at a solid enough 62 per cent of budgeted 2024 sales, although this was lower than the 71 per cent last year. 

Canaccord Genuity raised its adjusted pre-tax profit forecasts for the next two financial years by 8 per cent and 11 per cent, respectively. Analyst Mark Photiades said that the broker expects revenue growth to resume in 2025. 

The shares are rated at 12 times forward earnings, according to the analyst consensus on FactSet. This looks like good value if the margin recovery plan works out, but that remains to be seen. Hold.

Last IC view: Buy, 514p, 28 Jul 2020