IVE Group (IGL) had their AGM today and reaffirmed underlying NPAT at $33m for FY23. It’s tricky to work out the actuals because this doesn’t include a post-tax loss of Lasoo of $3.3m, nor the inclusion of the Ovato group trading for the 9 months to June 2023 less the quite large restructuring costs of some $22m which will be spread over FY23 and FY24.

 With a reputed Ovato TO of $160m per annum generating an underlying NPAT of $15m, there will be some leakage, so I’d be thinking that $140m as a stable base is a prudent estimate with a NPAT of around $13m. It’s best to assume that for FY23, Ovato will not contribute a dime in profits and in fact might incur losses because the reported restructuring costs of $22m are likely to be front loaded.

 That said, Ovato will make a full profit (and cash) contribution in FY25 with the profits in the two preceding years eaten away by the heavy restructuring costs.

 But there are two other catalysts occurring within IVE, Lasoo, which is being heavily marketed right now. We will have to wait until the end of Feb and 1HFY23 results to really see how successful this will likely be.

 The other catalyst is their intended foray into packaging, and again we won’t get any feedback here until 2HFY23.

 But the company is well managed and has potential. Consensus eps for FY23 are 22c and 27c for FY24. I think these are overly optimistic, but FY25 will be interesting with a 30c eps a good bet.

 I also doubt whether they can retain their very high div payout ratio which approaches 90%. Cash in FY23 will go towards those restructuring costs and greater working capital demands of holding greater paper supplies and such.

 This is a good stock to hold in a SMSF where one can make good use of the franked credits (well, at the moment, anyhow as I know Labor are salivating over these).   

The Ovato purchase is a game changer for IVE Limited (ASX:IGL) in that it gives it an absolute monopoly in commercial printing - in particular large scale heat set web offset (HSWO) print where they deal with large Tier 1 quality companies. The price paid to the administrators of Ovato was just $16m, which no doubt could all be attributed to machinery acquired at replacement value. And given that they are acquiring individual assets, there will be no legacy issues and they believe the inventory acquired in the price will roughly equal the assumed future staffing cost liabilities of staff they are retaining.

So, nothing paid for the ‘free kick’ of $160m in revenue against which they believe they can book a $15m increase in NPAT once this acquisition has been bedded down, which I take to be FY25. Yes, they will spend some $36m fully integrating the Ovato deal over the next two financial years, and this may impact on their ability to continue the already extremely high dividend payout ratio, but that is neither here nor there for mine.

Already the company has flagged a $33m NPAT for FY23, but this does not include the Ovato deal. I can see this being $66m by FY25 when the full rationalization has been completed and then they will have real economies of scale operating out of Perth, Victoria and NSW.

I am assuming the NPAT margin will increase over current FY22 results because of (a) ability as the only manufacturer in Australia to fully pass on all inflationary impacts (assumed at 5%) (b) grow the market by 4% pa as a consequence of cross-selling opportunities plus the emergence of Lasoo) (c) Possible better purchasing power for paper (d) savings to be had in administrative and occupancy costs.

Only real concern I have is the level of debt (net debt/equity of 53%) and the lack of transparency in their disclosure on potential headroom to accommodate the planned $38m in Ovato ‘bedding down costs. Plus, one must assume they will need additional working capital to fund the Ovato customers (inventory, debtors less payables). That’s why I do think the dividend will be crimped to accommodate this use of cash over the next two years.

But, think FY25 and an eps of around 45c and a ff dividend of 35c! That’s mouth-watering value at today's SP. A good one for the Super Fund. Plus, management are well invested (own around 8%).

Excellent bolt-on acquisition announced today, effective 1 Nov 2021. Will add an additional full year $45m in revenue and $4m in NPAT. Plus acquired for just 1.62x NPAT and this assumes earn out targets are met and paid. All paid from existing cash reserves and that extra $4m NPAT adds 2c per share in FY23 (approx 1.1c in FY22).

Announcement quote "This further strengthens our offering as the leader in the design and production of temporary, semi-permanent and permanent retail display solutions to leading Australian and Global brands."

My thesis is that given there is around $100bn in Aussie bank accounts (according to the Coles CEO), brands will be very eager to get their message out there super-fast when we take down the Covid shutters. This augers well for IVE going forward.

My estimates of eps and divs for the next two years are as follows:

FY22  eps 20.5c Div of 14c ff 

FY23 eps 21.7c – 23.1c Div of 14c ff 

Pretty exciting returns for any SMSF who can accept the franking credits.