Both deals expanded IG Design’s geographic reach, customer base, and product range, but brought with them debt, a greater reliance on seasonal Thanksgiving and Christmas stores, and exposure to retail giants like Wal-Mart. While such distribution relationships can be very helpful given the path to market they offer, they can also present challenges.
IG Design is outsourcing most of its production at a time of inflation and rising freight and input costs, leaving the company as a meat sandwich between its suppliers on the one hand and price- and margin-conscious retail buyers on the other.
Those challenges were at the heart of IG Design’s October 2021 and January 2022 profit warnings. The drop in profits also made it harder to service its debt and meet bank agreements, although careful management of working capital and costs has enabled the company cited by Aim to worry about doing so to do.
A refinancing over the next six months would give management additional leeway to work while the board and new boss seek to turn the tide of the company. With a small full-year profit forecast through March 2023, there are already some positive signs, and the stock could end up looking very cheap if the trend reversal lasts.
The market value of £127m seems low compared to consensus forecasts for sales of £788m, even if debt and leases are settled, while the 130p share price would look awfully tempting if earnings per share were close to its would peak at 16.9p in 2020 (we sold at 584p in 2018) and the dividend never got close to 8.75p again.
IG Design has its risks, but there are also opportunities. Obtain.
Questor says: Speculative purchase
Share price at close: 130p
This column did a relatively good job of tracking down companies whose competitive position was so strong and whose valuation was so enticing that they were acquired. Notable examples include Sky, Gamesys, Clinigen and ContourGlobal, where the deal is expected to close shortly.
However, we have given up others mercilessly just for a predator to pounce; Food casing specialist Devro is the latest example for Manx Telecom and Morrisons.
Frustrated by a stock price that just didn’t do anything, we eventually got bored and moved on with a small loss of capital.
Dividend income made up for that deficit, but the supply from Germany was 87 percent above our exit price.
Memo to self: be more patient.
Russ Mold is an investment director at AJ Bell, the stockbroker
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