4imprint’s interims show revenue growth of 16% (all organic) and a further small tick up in underlying operating margin to 4.8% (H118: 4.7%). The brand promotion initiative, launched in H118, is delivering online traffic and conversion better than initial expectations. We have again lifted our FY19 revenue and EPS forecasts, by 4% and 3% respectively. For FY20e the EPS uplift is 5%. Management’s revenue target of $1bn by FY22e looks likely to be achieved ahead of schedule. The group has five-year average cash conversion of 103% and a cash-rich balance sheet and we regard the current share price as well underpinned, with further potential upside.
Despite the premium growth (US market growth is estimated by management at 5.0%), the group’s current market share is around 3.0%, leaving plenty of scope to expand its reach further. The brand promotion initiative is successfully reaching the target audience, with new customer orders ahead by 8% year-on-year and existing customer orders up by 16%. Marketing yield was broadly flat, which is a good result given the step up in spend and the change in the mix. Average basket size is ticking up with the greater proportion of apparel, which also has a small impact on working capital. Our revised estimates assume some moderation in the pace of revenue growth, to 13% in H219 and 14% for FY20, with a small increase in operating margin, although within the basic premise that management drives the top line through managing the marketing spend towards a stable margin.
The extension to the Oshkosh distribution facility to meet the higher levels of throughput is nearing completion, with the group’s capex spend of around $4m in H119. The project budget was $5m. Management has flagged the potential requirement for more office space, and we will build this into our modelling as and when the plans take shape. Our current projection is for year-end net cash of $39.0m (was $38.1m), climbing to around $58m by the end of FY20e (was $55m).
4imprint’s shares trade at a premium to quoted UK marketing services peers, but it has little in common with them operationally. The group’s long, positive trading record, high cash conversion and progressive dividend also single it out. A DCF on our updated numbers suggests a value of £26.01 (on conservative assumptions of a 9% WACC and 3% terminal growth), from £23.26 at the time of our last note, part lifted by sterling weakness. An 8% WACC assumption would generate a value of £31.31.