UK Edition
A mixed full-year trading update from stationery, crafting, gifting and wrapping specialist IG Design last week leaves us in a bit of a quandary. We still have a healthy book profit since December 2022, trading is ahead of expectations and the balance sheet is improving. On the downside, the outlook is cloudy and management is preparing to write down goodwill relating to certain assets that will no doubt lead to a statutory loss for the year that ended in March.
Turnarounds rarely run smoothly, however, and it could be worth sticking with the stock, even if patience will clearly be required, although investors could be forgiven for deciding to cut and run.
Stewart Gilliland, the non-executive chairman, noted that full-year underlying operating margins, at 1.8pc, and underlying pre-tax income, at $9m (£7m), would both exceed the expectations laid out alongside November’s interim results. This is thanks, in part, to a good performance in Europe and the withdrawal from loss-making activities in America. Better still, the balance sheet is now net cash, before lease liabilities.
Regular readers will know that this column is a firm believer that less debt means less risk and less risk can mean a higher multiple of earnings and therefore potentially a higher share price. The improvement here should also help the board, including Paul Bal, the new chief executive, as it seeks to refinance the company’s existing borrowings in the next few months.
Positive news on that front could be the next catalyst for the stock, even if trading in the British market in particular remains tough, since IG Design is struggling to raise prices and cover higher input and freight costs.
The £153m market cap looks lowly relative to consensus forecasts for sales of £724m, even adjusting for cash, debt and leases, while the 160p share price would look tempting if earnings per share get anywhere near 2020’s previous peak of 16.9p.
The full-year results for the year to March 2023 are due for release on June 20 and the company could yet craft an exciting turnaround story.
Questor says: hold
Ticker: IGR
Share price at close: 160p
Update: Franchise Brands
Just over a year ago, this column featured a list of what it considers to be 10 red flags when looking at companies and the second on the list was any deal that is billed as “transformational”.
In this context, we must now consider the £200m deal struck by Franchise Brands to purchase Hydraulic Authority, the owner of Pirtek Europe, a specialist in emergency hydraulic hose replacement, announced earlier this month and closed last week, since the company described the deal as just that – “transformational”. As we must be true to our principles, we are going to lock in the 100pc-plus profit that we have (with 7.09p a share in welcome dividends on top), dating back to our initial study and reassess.
The Franchise Brands management team, spearheaded by Stephen Helmsley, its executive chairman, has a terrific record of making the franchise model, and acquisitions, work, so to second guess them could be a fool’s errand. But acquisitions work best when they bring one new variable at most and this deal looks to be bring three.
First, it brings £110m of debt on to a balance sheet that had previously been net cash. Second, it brings a different business into the portfolio of assets (even if you can argue the franchising principle remains the same), which includes MetroRod, Metro Plumb, Willow Pumps and Filta. Finally, it takes Franchise Brands into new markets in Europe.
Management may tackle such complexity with aplomb if their past record holds true, but the risks are now greater, even if the rewards may be, too. And then we have our concerns over (even prejudice against) the word transformational. Such deals often do transform a company’s fortunes, just not in the way they expect, especially as this column’s 30 years and more of experience in markets leads us to note this adjective can sometimes be code for “we really wanted this business so we may have overpaid for it”.
None of these threats may come to pass and frankly this column hopes they do not. We also note leadership’s assertion that the Pirtek purchase will be earnings accretive in its first year of ownership. The stock remains on this column’s radar, but protecting what we have feels sensible. It is therefore time to – reluctantly – wave goodbye to Franchise Brands for now.
Questor says: sell
Ticker: FRAN
Share price at close: 182.5p
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