Investment summary for International Greetings (IGR.L):
Progress confirmed
International Greetings’ full year trading update indicates an outturn broadly in line with our forecasts. Particularly important is the strengthening in the balance sheet, where the year-end net debt has improved to £42m, representing less than 3x EBITDA. Markets remain highly competitive and the group’s operating focus is firmly on driving efficiency in manufacturing and sourcing. The rating primarily reflects the group’s historic issues and each confirmatory update should help rebuild credibility.
Driving the mix
When the full numbers are published on 4 July, we expect to see an improvement in gross margin. This would reflect the greater focus on own brand (rather than customer brand), with a more concentrated portfolio that should reduce the number of SKUs offered. Upwards pressure on input costs is continuing, so the investment in improving manufacturing efficiencies is essential. We would expect the benefits of the Chinese factory move and the commissioning of the new high-speed press will come through more strongly in FY13. Our model had assumed total exceptional costs for FY12 of £3.0m, mostly relating to China. This figure will be higher, around £3.9m, reflecting greater cost for the Chinese factory move, but payback should still be at around two years.
Conservative top line assumptions
We are not anticipating any major uptick in the top line, but our assumed growth rates could be conservative if penetration into the dollar store segment in the US accelerates. The demise of Clinton’s in the UK has negligible impact as they were not a significant customer.
Valuation: Unchanged ‘undervalued’ view
International Greetings has no direct competitors across its various product categories, with the closest potential comparators being larger US concerns. The discrepancy between their valuations has narrowed slightly with the recent underperformance of CSS, underpinning the IGR share price, with greater potential upside indicated by a conservatively drawn DCF. For details of our valuation approach, see our Outlook note of March 2012.
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