ST Ives (SIV)

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Edmond Jackson's Stockwatch: St Ives Group

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

If the UK's economic recovery continues to evolve then a stockpicking theme likely to gather interest is cyclical shares trading on still-modest ratings. "Everything has its price", so be aware with second and third-tier cyclicals that there may be a volatile history and/or turnaround programme that the market is waiting to see proven by way of financial record.

St Ives (SIV) is in such a category, its FTSE SmallCap shares being a play on management's repositioning of the group to emphasise marketing services rather than print operations, which became seen as "commoditised" hence the shares' low rating. The group's vulnerability to recession was shown by normalised pre-tax profit plunging from £28.7 million to £7.3 million over 2008-09, however recovery since then has been pretty good, helped by a major rationalisation of the print side.

This is the main reason why Company REFS shows an annual average price/earnings (P/E) multiple of six to seven times over 2009-11, dropping to 4.7 times last year and averaging 8.1 times this year with St Ives rising from 105p to test 170p, currently 165p.

The market was initially cautious to re-rate SIV even as management guided forecasts higher, and when I drew attention in October 2012 the price was approaching 90p after results for the year to 27 July showed underlying pre-tax profit up 15.9% to £24.2 million on underlying revenue up 10.3% to £327.4 million.

Bear in mind that "underlying" here means stripping out various restructuring costs, losses from discontinuing businesses and amortisation charges related to acquisitions. Yet the emerging group looked to have good financial substance for a small cap share, and although a prospective P/E multiple of just five times meant taking an "underlying" view, the prospective yield was 7% covered 2.5 times by forecast earnings. So risk looked to weigh on the upside.

St Ives financial summary

Consensus estimate
Year ended 27 July
Turnover (£million)391387362297327
FRS3 pre-tax profit (£m)30.620.111.612.516.1
Normalised pre-tax profit (£m)29.57.2717.220.721.82628.8
FRS3 earnings/share (pence)14.1-6.1410.913.111.5
Normalised earnings/share (p)12.17.9414.816.817.515.917.1
Cash flow per share (p)28.428.535.719.13.23
Capex per share  (p)20.314.47.24-0.361.86
Dividend per share (p)
Net tangible assets per share (p)95.17268.453.823
Source: Company REFS.

While the shares have risen nicely, trading updates have been somewhat challenging to interpret as regards the trend in overall performance. Of £24.5 million operating profit in the 2011/12 financial year, marketing services contributed 16.4% and print 83.6% - so even as the group repositions to marketing services, factors affecting print remain important to the company's value.

Last November's interim management statement cited broadly flat revenue with growth in marketing services offsetting the exit from commoditised print; margins were up and underlying operating profit was ahead of the like-for-like August to November period.

On the print side, a Leeds facility was closed with work transferred to Bradford; while point of sale, service graphics and exhibition/events-related businesses were performing well, although books remained affected by changing order patterns. On the marketing services side, things were more positive with revenue and underlying operating profit "significantly ahead".

Interim results for the 27 weeks to 1 February 2013 showed underlying pre-tax profit up 10.1% to £12.2 million on underlying group revenue down 2.8% to £161.7 million. At the operating profit level, print slipped 3.5% to £8.5 million while marketing services jumped 72% to £3.8 million however "non-underlying items" (redundancy to amortisation costs) were £5.9 million for print and £6.7 million for marketing services.

It tested my patience to see £1.9 million "contingent consideration required to be treated as remuneration" treated as a "non-underlying item" within marketing services - yet ultimately still a cost in the value equation. The interim dividend rose by 14.3% to 2.0p with earnings cover nearly four times as basic underlying earnings per share rose 8.8% to 7.67p.

The market may also be taking heart from the turnaround in operational cash flow, which at the interim stage rose from £4.1 million absorbed, in the like-for-like 2011/12 period, to £14.6 million generated - enabling £10.3 million debt to be repaid besides underpinning the dividend, and if good cash generation is sustained then it should also help in making acquisitions. As of last February, net debt was £7.0 million.

A 12 August trading statement ahead of preliminary results, due 1 October, has affirmed market expectations for the latest financial year. The update does not quantify beyond saying "we are pleased with overall performance" of the print businesses "despite the ongoing difficult trading conditions," however it is notable that marketing services is beefing up headcount "both in the UK and internationally to support our plans for growth in this segment over the medium term".

While the chart looks as if St Ives has risen enough - nearly doubling in terms of total return, since last October - the prospective P/E based on normalised earnings is about 10 times and prospective yield about 4% - so if investors are looking for modestly-rated cyclicals then risk remains on the upside. Lower projected earnings per share for the current year relates to shares issued in relation to acquisitions.

The company and its shares are worth watching as a beneficiary of steady economic upturn. The ongoing repositioning towards marketing services and their feeding business into the print side coincides well with UK recovery. Among broker views, Numis has increased its target from 190p to 220p and N+1 Singer increased from 174p to 195p, since the 12 August update.

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