Interesting and accretive acquisition for IG Design. c8% EPS accretive to Mar 19 EPS

Thursday, Sep 21 2017 by

IG Design announced the acquisition of Biscay Greetings Ltd Pty for AUD$9m or £5.5m.

from the Biscay website

"Biscay Greetings Pty Ltd commenced operations in 1971
We pride ourselves on being one of the leading card companies in Australia.
The vast majority of our products are manufactured locally.
Our customer service and commitment is of the highest quality.
Biscays comprehensive range of products are outstanding value, and best prices.
We have a trained sales team that offers friendly service and advice.
Our sales team and warehousing are located Australia wide."

so it looks like a good fit with IG Desgins own business which says on its website:

"We are Design Group – we design, manufacture, source and distribute a wide range of products for life’s important occasions, to transform special moments into memories.
We’re a diverse group of companies operating across multiple regions, categories, seasons and brands. We work with the best retailers in the world, offering a full end-to-end service from design through to distribution. Our products are found within three core categories: Celebrations, Stationery and Creative Play, and Gifting."

The Financials
IG Design is paying $9m or £5.5m of which £3m is stock and fixed assets. Operating profits before tax were AUD $2.9m (£1.7m). So this looks to me like a v good deal at 3.2x EBT. In fact is it too good to be true? I wonder if a layer of cost is being left out as the IG Design uses the less often used "operating profit before tax". IGD does point out it will have to provide £1.8m of working capital. Maybe thats the reason why it has bought Biscay at such a low multiple? I will do some digging on this. 

If i can get comfort on the financials then I think this is a great deal. It neatly fits into IGDs product set. IGD already has operations in Australia which means they can integrate it quickly. Also its about 8% earnings accretive on my back of the fag packet maths. So the ple multiple to Mar 19 falls from c16x to c 14x . Combine that with a record order book and I can see the shares reasserting their previous highs.

If anyone knows anything else re the Biscay financials, then I would be interested to hear. 



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IG Design Group plc, formerly International Greetings plc, is engaged in the design, manufacture and distribution of gift packaging and greetings; stationery and creative play products, and design-led giftware. The Company's geographic segments include UK and Asia; Europe; USA, and Australia. The Company sells its products in over 150,000 stores across approximately 80 countries. It also offers a portfolio of licensed and customer bespoke products suitable for sale through multi channel distribution. The Company's products include crackers, pens and pencils, stickers, single cards and gift wrap. The Company offers its products under the brands A Star, B Stationery, Papercraft and Pepperpot. Its subsidiaries include Artwrap Pty Ltd, International Greetings UK Ltd, International Greetings USA, Inc, International Greetings Asia Ltd, The Huizhou Gift International Greetings Company Limited, Hoomark BV, Anchor International BV and Hoomark S.p.z.o.o. more »

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19 Posts on this Thread show/hide all

runthejoules 22nd Sep '17 1 of 19

Thanks Veg. I bought tfd recently and this was a nice surprise. I'll follow this for any other well-informed comment.

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VegPatch 22nd Sep '17 2 of 19

i was hoping Paul would make one of his miraculous 4am comments on the acquisition. But alas no
Its Friday so i know Graham does most of the deep thinking today.

but one can hope



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VegPatch 22nd Sep '17 3 of 19

Spoke to a City contact of mine this afternoon. He pointed out that the Biscay acquisition is being done by their 50% JV in Australia. So my 8% accretion is closer to 4%. Apologies for my over optimism.

Also acquisitions in this space are usually at 5-6x EBITDA. Turned another way, what does that suggest about IG Designs own valuation ? I guess the acquisitions are typically of smaller, private businesses so command a lower multiple. But its worth bearing in mind if the multiple were to run away with itself!

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pone 6th Nov '17 4 of 19

So I know next to nothing about this company, but what stands out immediately is that revenue growth is stagnant, except for the big jump in 2017. Was that an acquisition? The whole story here seems to be about operating margin improvements, but how many more years can that continue?

That market is pricing them - based on TTM earnings - as an 18% grower. I just cannot wrap my arms around a company like this growing at an 18% clip for 10 years.

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Howard Marx 6th Nov '17 5 of 19

In reply to pone, post #4

Pone, you appear familiar with using DCF valuation methods

As you'll be aware, the result is most senitive to (i) the discount rate (ii) the terminal growth rate

So to claim that the "market is pricing them - based on TTM earnings - as an 18% grower" doesn't reveal much unless you reveal your assumptions on (i) + (ii)

Seems to me that if you assume a starting FCF of £12.5m, embedded expectations for IG Design (LON:IGR) are for just a 4% growth rate in perpetuity (assuming a 9.5% discount rate)

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pone 6th Nov '17 6 of 19

In reply to Howard Marx, post #5

@Howard, I used 15 pence of 2017 earnings growing 18% for 10 years, and then 4% terminal growth for another 10 years, at a 12% discount rate. That gave 374 pence versus the actual price 378 pence (as of today). I'm not intending any great precision in any of these numbers. I simply want to get a sense for the approximate amount of compound growth that the current price implies.

I am shooting from the gut here, but my guess is that in an established industry like greeting cards, any double-digit earnings and free cash flow growth is about cost-cutting and improving operating margin. That lasts a few years and eventually, the operating margin growth has to approximate the revenue growth, which looked flat for most of the last five years, in this case.

And, yes, I always start with a DCF, because it is the rate of compounding of earnings or FCF that most closely aligns to where the stock price will be in the future. You can tell a LOT about an investment very quickly just by looking for a mismatch between the implied growth rate and the common-sense growth rate. A tech product in a market that is growing 10%+ each year that is priced for 5% growth is probably undervalued. A company selling an old-world product that is in a market that grows at 2% per year that is priced for 10%+ growth is probably overvalued. Of course details matter but being able to make quick judgements on such things stops you from wasting time and prioritizing research on things that have higher probability of panning out.

A caveat to the above, is the company needs a competitive advantage / moat that allows them to sustain the compound growth rate for 10 years.   Not many companies have a moat.

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abtan 6th Nov '17 7 of 19

In reply to pone, post #4

Hi Pone
May I ask where the 18% growth for 10 years is derived from?

As an aside, the reason that attracted me to IG Design (LON:IGR) was the ridiculously high cash generation, especially after stripping out the now paid off debt from last year's accounts (and even after adding back in what looks like a one-off AP benefit.) 

They took on some debt for the latest acquisition, but this was relatively small, so my fingers are crossed for some special dividends in the near future.

You mentioned that IG Design (LON:IGR) doesn't operate in a high growth market. Nonetheless they are growing both organically and through (sensible?) acquisitions, and the expected margin improvement, on top of these increasing revenues, bodes well for a (relatively) debt-free, highly cash generative company.

Maybe not the next ASOS or BOO, but, in my opinion, a safe play in the current market.

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Howard Marx 6th Nov '17 8 of 19

In reply to pone, post #6


I see that you are using an unconventional DCF method. By assuming a terminal period of just ten years you have effectively assumed that the company will not exist in 20 years time.

Conventionally however, the terminal value is based on a timeline in perpetuity.

With this latter method, expectations embedded in the share price assume a 13.5% for the first ten year period (as opposed to 18%).

This to me still seems excessive for a company operating in a mature industry.

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pone 7th Nov '17 9 of 19

In reply to abtan, post #7

@abtan, the best way to address your question would be for you to find a DCF calculator on the web, then plug in some numbers and let us know what you come up with. I already stated my exact inputs to the calculator in my earlier reply.

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pone 7th Nov '17 10 of 19

In reply to Howard Marx, post #8

@Howard, can any of us really predict the world beyond 20 years? I think people are simply deluding themselves if they try to justify a stock price by predictions of economic activity that go beyond 20 years. I think it is prudent to demand that that the stock give sufficient performance in the first 10 years to justify most of its price, and assuming even another 10 years of activity is prone to a large margin of error.

I think your numbers show the problem I was raising as well as mine do. Does anyone believe that a greeting card company - a very mature business category - that has stalled revenue growth can pull out 10 years of 13.5% growth in earnings or free cash flow? I think it stretches the imagination.

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abtan 7th Nov '17 11 of 19

In reply to pone, post #9

Thanks. that's genuinely appreciated.

I haven't done DCF for many years and whilst I don't understand the rationale behind figures in your assumptions (18% growth pa + 12% discount rate - I know what these mean, I just don't know why you chose them) it's useful to see how other's value shares.

I personally try not to look more than a few years ahead. There are too many unknowns in that time period as it is.

Best of luck

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pone 7th Nov '17 12 of 19

In reply to abtan, post #11

@abtran, what I did is take a DCF calculator and I solved for the growth rate. 18% is not my number. 18% was the number you had to enter into the calculator to get from the current earnings to the share price.

@Howard's exercise shows how changing other variables like the length of the terminal period can also affect the result, but even changing variables as he did the primary growth period required a 13.5% growth rate to get from the current earnings to the current share price.

You can choose alternate numbers, but I suspect that those too will uncover that the current share price has a lot of growth baked into it.

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VegPatch 7th Nov '17 13 of 19

Given your pretty demanding inputs in terms of discount rate and DCF longevity, I'd be interested to know which companies look interesting on that basis?

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pone 7th Nov '17 14 of 19

In reply to VegPatch, post #13

The inputs I am using are the default values at Gurufocus so I don't perceive that I am imposing anything extra. Yes, it's more conservative, but honestly asking for payback of a stock price through earnings or cash flow over the next 20 years is not pushing the envelope of demanding.

To answer your question, I am starting to warm up to some of the UK cyclical companies, particularly if the UK has a mild recession. I am pretty interested in Safestyle (SFE) because the balance sheet looks like it is impossible to bankrupt the company, and they have a competitive advantage that would allow them to grow the company at over 8% on average for quite a while. I would like to buy them under 150 pence, which is not so crazy when you consider on their most recent trading announcement they briefly traded at around 125 pence before buyers overwhelmed the stock. In a real recession they should trade 100 to 150 pence.

I like many of the stocks you have written about, and you actually do a terrific job of uncovering the most relevant points of those. Some notes on those:

* I like FEVR quite a lot, but unfortunately the very high growth has the stock into nosebleed territory. I think they can grow 25% sustainably and I would probably start buying them around 1400 pence. They keep surprising to the upside - frequently - so that is going to be hard without a market correction.

* I like Somero (SOM) but I have not finished research on them. I want to say they can reliably grow at 8% and I would like to buy them at a price under 250 pence that factors in under 5% growth.

* I like Bioventix (BVXP), particularly if they have a down release after the expiration of the contract for one of their antibodies. That's probably not going to happen, but I would be a buyer between 1000 and 1500 pence.

* SafeCharge (SCH) might actually be a buy, even at the elevated price. The current price seems to factor in under 7% growth and my gut - and the historical results - suggests they can grow faster. I haven't really started any research on them.

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herbie47 7th Nov '17 15 of 19

In reply to pone, post #14

So you want high quality growth shares at bargain prices? I'm sure we all do but not sure the market will let us have them. I used to be like that waiting for the right price, but often in vain. You may want to read some of Paul Scott's older reports, he used to be a value investor also, here is one about Fevertree Drinks (LON:FEVR) when it was 317p:

Minervini quote "I believe that far more money is made buying high and selling at even higher prices.”

I think growth shares you need to get in early, often there is a strong growth period of about 2-3 years then things either level off or the shares may crash such as Crawshaw (LON:CRAW).
I would be looking for 2-3 growth and then moving on if growth begins to fall. If you are buying when the share price has gone down that maybe because the growth phase is over. UK small caps stocks are too unpredictable for any long term view, it's probably quite different from the US market.

Nothing wrong with having a watchlist with target prices. By the way I have invested in 3 out of 4 of those companies. Bioventix (LON:BVXP) was the first company I bought after joining here.

If the share price falls because of a market correction have you not to reassess the price compared to other shares?

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pone 7th Nov '17 16 of 19

In reply to herbie47, post #15

Regarding recession, I am sure I would reassess many things based on severity of the recession, but in general I am interested in companies that can compound growth for many years, and a recession is probably just a blip in that timeline.

I like to buy things that can grow for many years at prices that imply the growth rate will be about half of what I hope it will be. That's not that unusual for that to happen. If you miss it you miss it.

I don't sense the urgency you do on getting in right away. If you wanted to invest in Amazon, you had three or four key opportunities over a 20-year history to enter at a good price relative to growth. I set up my watchlists, and I catch some and I miss others.

Of the ones I listed, I think Bioventix could offer some spectacular entry point. The liquidity for that stock is extremely poor, so if enough people try to exit at the same time the price is going to get smashed quickly, and extremely. I give it about a 30% chance of releasing a bad report sometime in 2018.

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herbie47 7th Nov '17 17 of 19

I understand but Amazon is an exception, I don't know of any UK companies like that, the best company for growth over a sustained period I can think of is Ashtead (LON:AHT) and yes there have been entry points for that. Trouble is you are looking at some high growth companies such as Fevertree Drinks (LON:FEVR), this growth is unlikely to be sustained maybe you are better off finding companies that are growing at 20-30% per annum. Boohoo.Com (LON:BOO) grew very fast but now that phase maybe coming to an end. You could be right about Bioventix (LON:BVXP), I'm waiting to buy back in.

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pone 7th Nov '17 18 of 19

In reply to herbie47, post #17

The market is constantly changing its best *guess* about future growth. So there are usually plenty of opportunities to take a position. This is not like a bond where we know all the parameters and then it is about the risk of solvency, interest rates, etc. Fever Tree is a good example. It keeps showing 50% growth and the market knows that is not sustainable and keeps trying to back down to something more reasonable. We never get to find out what that guess is because as soon as the price starts down, the company releases another "surprise".

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herbie47 7th Nov '17 19 of 19

In reply to pone, post #18

But if you look at young growth companies such as Boohoo.Com (LON:BOO), Fevertree Drinks (LON:FEVR), Keywords Studios (LON:KWS), Burford Capital (LON:BUR), over the last 2 years you will see the share price has gone up about 5-7x. They have had a growth spurt. Now I'm not saying they won't go up again by 6-7 times in the next 2 years but I think the probability is fairly low. As you say they are trying now to find their level, Fevertree Drinks (LON:FEVR) actually has shown 100% growth and I agree it's unlikely to sustain that for much longer. You can take a position when you like but it's about how quickly the shares go up or down. Maybe you should have bought when it dipped down below 1900. I did consider topping up but thought it was too risky so let it pass. So do you want to own a share that goes up 7x in 2 years or do you want to wait to buy it and then it goes up 20% a year? Yes you are right it's very unpredictable, that is why some investors won't invest in small companies, even more will avoid AIM shares.

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