UK Edition
Questor: IG Design’s US acquisition inevitably carries risk, so sell now and bank your profits
A run-up in IG Design’s shares following its acquisition of American rival Impact Innovations leaves this column with thumping capital returns on its advice to buy last year. Given that all deals come with risk this feels like a good time, if with some reluctance, to take profits.
It is easy to see why investors in IG, the card and gift-wrap specialist, have greeted the purchase of Impact Innovations quite so warmly. Enhanced scale and market share in America, the chance to cross-sell to giant retailers such as Walmart and Kroger and a targeted $5m (£3.9m) in cost efficiencies within three years all support analysts’ view that the transaction will help to increase profits in each of the next three years.
The purchase comes with an initial agreed price tag of £56.5m in cash. IG Design will then inject a further £27.9m by way of investment in stock and working capital in preparation for the imminent festive season.
Then comes a £15.4m share award to Impact’s chief executive John Dammermann and his wife, partially as payment to cover a debt owed to the Dammermann family, who are also the company’s founders.
Impact had sales of $156m and pre-tax profits of $7m, so the total price paid does not look toppy, especially as management believes that the working capital investment will be paid back very rapidly.
Moreover, IG Design’s balance sheet had net cash before the transaction and a £50m share placing will fund the bulk of the purchase price and working capital needs. Institutional investors have already stumped up £32m at 510p a share and approval for the remaining £18m in fresh funds from a second placing should come from a general meeting scheduled for Sep 17.
Yet any deal brings risk – transatlantic ones especially so. Three dangers in particular spring to mind.
First, the number of British firms to have come a cropper when buying an American business is legion (the old joke about “two peoples divided by a common language” exists for a reason).
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Second, Impact’s seasonal décor business means its revenues and profits are more seasonal than those of IG Design, with a huge slant towards Thanksgiving and Christmas in the calendar fourth quarter, which currently generates some 85pc of Impact’s annual sales.
Finally, Walmart will represent around of fifth of IG Design’s sales. This could be a good thing but it does mean that IG Design could find itself negotiating with a much, much bigger firm on matters such as volume and price.
None of these threats may come to pass and this column hopes they do not. Yet a forward price-to-earnings ratio of about 24 factors in a lot of the good news and not much by way of potential risk. As a result it is time – very reluctantly – to wave goodbye to IG Design for now, although it will remain on this column’s radar.
Questor says: sell
Ticker: IGR
Share price at close: 584p
Update: Xaar
When you go looking for trouble, in the form of a turnaround play, there is a good chance you will find it, and Xaar is proving to be a case in point.
This column’s initial look at the firm, a global leader in digital inkjet printing, in late July noted that profit warnings tended to come in bunches; Xaar has now lived down to that low expectation.
Unfortunately, the latest alert was a big one and the shares are now a third lower than when we tipped them, which is most embarrassing.
At least analysts were already expecting a profits decline in 2019 as well as 2018 and the company has net cash on its balance sheet, so there is no time pressure on management or shareholders, for now in any case.
We shall just have to sit, suffer and hold, waiting for the product cycle to turn and demand for the company’s new printhead to come through.
Questor says: hold
Ticker: XAR
Share price at close: 185p
Russ Mould is investment director at AJ Bell, the stockbroker
- Questor archive: telegraph.co.uk/questor