On a roll
The year-end trading update confirms that International Greetings (INGR.LONDON) will have delivered profits in line with market forecasts, albeit with a different geographic split. The performance on cash generation has been better than we were anticipating and the focus on debt reduction will result in a figure below our £44m forecast, despite the recent major capital expenditure. This should reassure the market that the balance sheet improvement is in hand and but not at the expense of future growth potential. The shares remain modestly priced given that the return on all the hard work should start to become apparent in what is now the current financial year.
Capital project on time and on budget
The major project to upgrade the Welsh facilities, switching from gravure to flexographic printing and from solvent-based to water-based inks, is both on time and on budget. Following from the upgrade of the Dutch facilities, it leaves the group with very efficient high-volume manufacturing – essential in a low unit cost product environment where overall market growth is minimal. Capex should fall markedly in FY15, indicating an accelerating reduction in the debt burden over the course of the year.
Europe performance ahead, US shy
While the statement itself contains little detail ahead of the finals scheduled for 2 July, the European business is reported as having delivered “excellent growth” – particularly encouraging given the earlier Dutch investment, while the US suffered from the dreadful winter weather conditions in an otherwise sound trading environment. Our estimates are unchanged. The current year order book is encouraging, giving further credibility to the prospects that it will be FY15 when profits start to move ahead from their current plateau and that the payment of dividends is a more realistic prospect.
Valuation: Clawing back the market discount
As confidence builds that management’s strategy is delivering with respect to the debt reduction and that the payment of dividends is edging closer, the shares have benefitted from some rerating. There is now no sensible international peer group, given one of the US companies has been taken private and the other has limited liquidity. However, our unchanged DCF based on conservative assumptions derives a value of 85p, while we estimate the value of the underlying assets at the year end at 88p.
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