US Edition
Regular readers of this column will know that one of our favourite trends at any company is a reduction in debt. Lower borrowings mean less risk, as well as lower interest costs.
A less risky business can attract a higher multiple of earnings from investors to reflect greater certainty that profits will be maintained or increased in future, while lower interest costs mean, all else being equal, a rise in profits. Hence the potential for a nice double boost to the share price from a fall in debt.
IG Design, the stationery, gift wrap and crafting specialist, looks like a case in point, rather as we hoped in our study of December last year.
The shares jumped nicely last week thanks to comments in a trading update from the company that cash flow had exceeded forecasts, with the result that debt was lower than expected.
The Aim-quoted concern achieved this thanks to cost cuts and operational efficiencies, even as sales in the first half of the fiscal year to March 2024 fell year-on-year, owing to weakness in the US market in the run-up to Christmas and some normalisation in seasonal ordering patterns.
IG Design therefore still has much to do, even if chief executive Paul Bal seems confident that profits and cash flow will improve considerably in the current financial year.
A refinancing in June and continuing debt reduction give Bal and the revamped management team room in which to work and the good news is that analysts’ sales and earnings forecasts are rising.
That slow start to the festive selling season in America may have wider implications for consumer spending, so this is a trend that must be carefully monitored, especially by any investors who own stocks that rely on the US consumer and trade at a high valuation thanks to lofty expectations of future growth.
At least in the case of IG Design we have some protection against any such adverse trends, since its £132m market value compares with $206m (£170m) of inventory on the balance sheet and net tangible assets of $263m (£217m at the current sterling/dollar exchange rate of $1.21).
There is also potential for gains should the company even come close to achieving its goal of returning to pre-pandemic operating margins of around 7pc by March 2025, since earnings per share reached 16.9p in 2020.
The shares trade at barely eight times that figure, although more work is needed on the balance sheet and the risk of a slowdown in consumer spending is not one that can be dismissed easily, so the stock is best suited to aggressive, risk-tolerant investors, not cautious ones or income seekers.
The first-half results will be published on Nov 28; meanwhile the continuing reduction is debt is a welcome trend at IG Design and we will hold.
Questor says: hold
Ticker: IGR
Share price at close: 134p
Update: Admiral
If this column had a pound for every complaint heard from friends this year about increases in the cost of car insurance, it would not need an investment portfolio. At least higher premiums help to support our thesis for Admiral, whose shares now trade at an 18-month high, to suggest that we may be on the right track with the provider of car, travel and pet insurance following our tip in April.
Admiral has said little since its first-half results in August, but Sabre Insurance offered encouragement with its latest update in the middle of last month. The FTSE 250 company reported a 20pc increase in total gross written premiums for the first nine months of 2023, when a 34pc rise in car-related business more than offset slower markets for taxis and motorcycles.
Sabre had already indicated a focus on price rather than volume and this read positively for others in the industry, especially as the company raised its guidance for growth in gross premiums written for 2023, made no change for its expectations to its combined ratio (a key measure of profitability) and showed a clear improvement in its solvency ratio.
Claims inflation in the double digits is still a challenge for the industry and autumn’s rotten wet weather is another potential test, but price increases should help to ameliorate the impact. Further signs of improvement in Britain’s motor insurance market, as well as ongoing reductions in start-up losses in America and Europe, could in turn boost Admiral.
Best known for its Admiral, Diamond and Elephant brands, the FTSE 100 company is now expected by analysts to report a modest increase in pre-tax profits in 2023 and then healthier gains, and a return to dividend growth, in 2024.
Forecasts of a 124p-a-share dividend for next year would equate to a yield of 5pc, so patient investors can expect to be paid while they wait for a potential earnings recovery, which could also fuel further share price appreciation.
Admiral has the potential to maintain its momentum. Hold.
Questor says: hold
Ticker: ADM
Share price at close: £24.40
Russ Mould is investment director at AJ Bell, the stockbroker
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