One of the themes we have been exploring over the last few weeks is high yielding small-caps. Investors typically turn to small-caps for growth and those with unremarkable prospects are often ignored for extended periods of time. This leaves a swathe of solid, income generating businesses trading well below fair value. IVE Group (ASX:IGL) is one of them, operating in the niche, structurally mature print production market, without much blue sky. Look a little further however, and you may see a leading and vertically integrated marketing business with a unique multi-service offering. Such features have enabled the group to win market share from smaller competitors, boosting growth in an otherwise flat market.
Much of IVE’s ongoing strategy is centred on building this competitive advantage by expanding its offering further to create a one stop shop for print marketing. Fortunately, IVE’s scale advantages and superior access to funding have allowed it to become an acquirer in a fragmented market yearning for consolidation. This has added to IVE’s industry leading margins and enviable return on equity. That being said, IVE’s ROE is also being buoyed by high leverage, which will decrease over the medium-term. With consolidation ongoing in the market, we would expect pricing to remain rational and margins to be largely preserved. Its latest acquisitions of Franklin Web and AIW Printing were EPS accretive and further expanded the group’s offering into new verticals. This is emblematic of the kinds of opportunities that exist in this market, and which IVE is ideally placed to exploit.
Figure 1. Industry DuPont analysis
Source: Thomson Reuters Datastream
Nevertheless, IVE still operates in a mature, cyclical industry confined to those niches leftover from the digitisation of marketing. It may never deserve to trade at a market multiple as a result but on a forward price/earnings multiple of just 8.3 times, and with a yield forecast to reach 8.0% in FY18, IVE appears undervalued. Relative to its peers in traditional media, all of which are facing relatively stronger headwinds, it also appears cheap. IVE is a recent listing (though with a long unlisted history) and it may take time before the market examines the business in more depth. It will also need to prove that its acquisitive strategy is repeatable and value accretive, and that its core business is at least maintaining market share.
In the upcoming result, investors should look for signs of acquisition integration, any organic growth and improvement of the balance sheet. For those familiar with StocksInValue’s financial strength tab under ‘Key Ratios’, we would be looking for overall improvement in financial health, as was the case prior to 1H17 when the group re-leveraged itself.
Figure 2. IGL financial strength
As it stands, IVE is a solid, well-run business with a leading position in a mature, niche market. It has high margins and an enviable return on equity, hallmarks of a strong competitive advantage. As it deleverages following its latest purchase, it will once again create space for further acquisitions. Of course, we would stress that IVE is at the riskier end of the spectrum given its size, cyclicality and lack of structural growth. In this case however and, in contrast to most other small-caps, investors with a higher tolerance can collect a very high, fully franked yield while waiting for any price appreciation.