There are three reasons risk-averse investors can look away now, or at least skip to the bottom of this column. First, we are looking at a small, even “micro-cap” stock. Second, it is a turnaround play and the danger with such investments is that they may fail to turn around. Finally, it is a return visit to a share previously traded with some success (we said buy in 2017 and sell the following year at a 120pc profit), which may just be tempting providence.
So, for those brave enough to keep reading, this takes us to IG Design, where last week’s first-half results offer a glimmer of hope that 2023 may prove to be a lot more profitable than 2022.
Debt is lower than feared, cost cuts are helping to support operating margins and management now expects a small pre-tax profit rather than a loss for the full year to March 2023. All of those trends should also help management, led by the newly appointed chief executive Paul Bal, as they seek to refinance the company’s debt in the next six months.
Admittedly, net debt still rose to $74m (£60m), from $59m in March, at the end of the last financial year (and it stood at double that once lease liabilities were included). IG Design also passed on its interim dividend, just as it did on last year’s final payment. This is still the uncomfortable legacy of two acquisitions.
The first was 2018’s purchase of the American business Impact Innovations for an all-in cost of just under £100m. The second was 2020’s swoop for CSS Industries, another American concern, for £90m including debt.
Both deals broadened IG Design’s geographic reach, customer base and product range but they brought debt, an increased reliance on seasonal business at Thanksgiving and Christmas and exposure to retail giants such as Wal-Mart. While such sales relationships can be very helpful, given the route to market that they offer, they can bring challenges too.
IG Design outsources the majority of its production and at a time of inflation and rising freight and input costs that leaves the company as the meat in the sandwich between its suppliers on one side and price and margin-conscious retail buyers on the other.
These challenges lay at the heart of IG Design’s profit warnings of October 2021 and January 2022. The slump in profits also made it harder to service its debt and stay within banking covenants, although careful management of working capital and costs has enabled the Aim-quoted concern to do so.
A refinancing in the next six months would give management additional room within which to work as the board and new boss seek to bring about a turnaround in the company’s fortunes. There are already some positive signs, given that forecast of a small profit for the year to March 2023, and the shares could end up looking very cheap if the turnaround can be made to stick.
The £127m market value looks low relative to consensus forecasts for sales of £788m, even adjusting for the debt and leases, while the 130p share price would look awfully tempting if earnings per share got anywhere near their 2020 peak of 16.9p (we sold in 2018 at 584p) and the dividend ever got near to 8.75p again.
IG Design has its risks but there is opportunity too. Buy.
Questor says: speculative buy
Share price at close: 130p
This column has done relatively well to sniff out companies whose competitive position was so strong and whose valuation was sufficiently tempting that they were taken over. Notable examples include Sky, Gamesys, Clinigen and ContourGlobal, where the deal is expected to close very shortly.
However, we have gormlessly given up on others only for a predator to pounce; the food casings specialist Devro is the latest example to add to Manx Telecom and Morrisons.
Frustrated by a share price that simply did nothing, we eventually got bored and moved on for a small capital loss.
Dividend income offset that deficit, but the bid, from Germany, came in 87pc above our exit price.
Memo to self: be more patient.
Russ Mould is investment director at AJ Bell, the stockbroker
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