International Greetings
International Greetings’ Q3 trading update indicates a good Christmas performance and results for the year tracking in line with market forecasts. Clean sell-through on the high street should buoy retail confidence for this year, with a particularly strong continuing outlook for the Frozen and Despicable Me licensed lines. Investment in manufacturing facilities is paying off in terms of efficiency, driving the FY16 margin in territories where the spending has taken place. The cash profits should deliver meaningful debt reduction, bringing the payment of dividends ever closer.
UK, Europe and US all performing well
The upgraded Welsh and Dutch manufacturing plants are producing higher volumes at greater efficiency; FY15 results will show a full year benefit from Europe and five months from Wales. H114’s Enper acquisition (customers and assets) has been fully integrated, retaining all its accounts. UK performance has been good across all categories, from discounters through to upscale retailers. The order book is reassuring, with notably strong listings for licensed product in gift packaging and creative play. Good positioning with the ambitious major US dollar store chains should mean the group’s revenue growth will have outperformed the overall US social expression market. Australia remains the most testing region, with forex dampening achievable margins. FY16 prospects here improve with product mix changes.
Concentrating on cash
With the major investment programme now complete (on time and on budget), the group can now concentrate on converting operating profits into cash. The growing emphasis on everyday product should mean a less spikey cash profile across the year. The trading update was not specific on numbers, but we anticipate improving cash conversion driving down debt more strongly. By the end of FY16 our model indicates net debt of £30m, 1.7x forecast EBITDA, below the 2.0x target level that management has indicated is needed to consider paying a dividend.
Valuation: Discount overdone
With the return from the capital investment set to come through more strongly from FY16, the underlying earnings per share are set to grow faster, helped by a lower tax charge. However, the share price still stands at a discount to its only remaining quoted peer (NYSE: CSS, which had a more muted final quarter of 2014), its DCFderived valuation and the group’s underlying NAV. These measures justify a valuation range of 89p to 98p, well above the current share price level.
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