By Cheryl Cole Aim-listed International Greetings has built itself into a major force world...
By Cheryl Cole
Aim-listed International Greetings has built itself into a major force worldwide in gift-wrap, greetings cards and other paper products. Active acquisition and strong organic growth have meant that profits have risen for six years.
International Greetings is probably the third-largest company in its field. The US's Hallmark is the biggest, with a market capitalisation of £3bn. American Greetings comes in second at £2bn. International Greetings is a relative minnow, but boasts 45% of UK market share.
The Aim-listed company is worth an estimated £145m. It has recorded profit growth for the past six years and in the six months to 30 September 2000, its sales rose 14% to £37.9m and profits edged up 9% to £2.7m. Earnings per share were 4.5p, compared with 4.1p in the same period in 1999.
The Stephen Lawrence Company, a US acquisition made in May, contributed turnover of £1.19m and an operating loss of £160,000, with much of the loss resulting from moving its production from New Jersey to the group's main facility in Georgia.
Broker Old Mutual has trimmed International Greetings' 2001's full-year forecast from £11m to £10.7m and EPS of 18.3p, because of steps being taken to improve its methods of sourcing supply. Some slowdown in profit growth is also expected while it lays further foundations in the US to secure growth.
Almost 60% of group sales are generated in the Christmas period. Debt levels peak in September and October, although there is ample headroom in working capital facility at this time. Deliveries to customers then reduce this towards the end of the calendar year. The group is currently ungeared.
International Greetings' core business is designing and manufacturing private-label products for major multiple retailers, approximately 80% of its UK revenue. Given design and production schedules, there is a significant lead time between order and supply. The group therefore manufactures to order and so has limited stock risk.
This also allows for reliable forecasting of group revenue and profitability. By March, most of the major multiples will have placed orders, or given firm indications of doing so, so management can accurately predict results for a particular financial year.
About 12% of sales come through Woolworths but International Greetings also supplies Tesco, WH Smith, Boots, Sainsbury's, Next and John Lewis. Tesco and Sainsbury are currently the biggest sellers of Christmas crackers and cards in the UK.
Some 25% of turnover comes from the intellectual property division, Copywrite. This holds lucrative licences for Chicken Run, Barbie, The Simpsons and Harry Potter, with International Greetings producing its own patterns and formats. The company also ensures that retailers that carry the risk on licences by paying in advance. The group plans to grow this side of the business in a controlled way through continually spreading the risk over a number of licensed products.
Analysts expect an improvement in underlying margin through improved efficiency and through Copywrite's being able to source production in the Far East. This should provide margins that are improving towards average group levels over the next two to three years.
The group has mainly grown through acquisition. In 1985 it bought a decoration maker in London. In 1989 it snapped up Hysil, the oldest gift-wrap company in the US. Bright Sparks, a Welsh cracker maker, was added in 1992. The company also introduced rolls of wrapping paper to the UK. This has since largely displaced the traditional sheet paper.
Organic growth is being driven in the UK by supplying existing customers with an expanding prorange, and the trend for both retailers and consumers to want better-quality products. Since the 1980s consumers have quadrupled the spend on gift-wrap.
The integration of a range of Halloween products is expected to add £1m to turnover this year.
In the coming year the Stephen Lawrence acquisition is expected to add sales growth of 20%. Profits are growing in the US and an enlargement of the business is under way.
International Greetings' presence in Europe is concentrated in Scandinavia. There is no European market for crackers outside the UK but cards and paper products successfully sell through retailers such as Costco.
The group spent £600,000 opening up a Hong King office, International Greetings Asia. This will enable it to better source certain products from there, notably Christmas cards.
On average International Greetings reinvests about £2m each year. It also ensures that capex equals depreciation every year. UK return on capital is well over 50% and earnings have more or less quadrupled in five years.
The share price has risen from 56p at flotation in 1995 to 337p.
IG already has a dominant market position in the UK. Expansion of the US facilities, broadening of the product range and development of supply sourcing from the Far East are all expected to enhance organic growth alongside further acquisitions. US turnover for the full year should be up more than 30%. The shares are a long term buy.