Custom electronics focus paying off

Acal 10 June 2016 Outlook

Acal

Custom electronics focus paying off

FY16 results

Industrial support services

 

10 June 2016

Price

255.8p

Market cap

£164m

€1.28:NOK11.8:£1

Net debt (£m) at end FY16

38.1

Shares in issue

64.2m

Free float

99%

Code

ACL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.6)

0.3

(17.5)

Rel (local)

(3.6)

(1.4)

(11.3)

52-week high/low

325.8p

240.0p

Business description

Acal is a leading international supplier of customised electronics to industry. It designs, manufactures and distributes customer-specific electronic products and solutions to 25,000 industrial manufacturers.

Next events

Trading update & AGM

26 July 2016

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

Acal is a research client of Edison Investment Research Limited

Acal’s strategy to develop its custom electronics manufacturing business hit a major milestone in FY16, with Design & Manufacturing (D&M) now generating more than half of revenues and a much larger majority of profits. We expect this trend to continue, through organic growth and additional acquisitions, supporting further growth in operating margins.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

03/14

211.6

6.9

13.1

6.80

19.6

2.7

03/15

271.1

12.4

16.4

7.60

15.6

3.0

03/16

287.7

15.2

17.8

8.05

14.3

3.1

03/17e

309.8

16.5

18.4

8.30

13.9

3.2

03/18e

319.6

17.7

19.3

8.50

13.2

3.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY16 results: D&M strength supports profitability

While FY16 revenues came in below our forecast (mainly due to Custom Distribution (CD) weakness in the UK), operating profit and margin benefited from stronger D&M performance, resulting in normalised EPS 7.8% ahead of our forecast. Net debt of £38.1m was lower than we forecast, equating to a year-end net debt/adjusted EBITDA ratio of 1.7x (within management’s target range 1.5-2.0x).

Design & Manufacturing now the majority of business

In FY16, D&M generated 48% of revenues (51% annualising acquisitions) and 78% of operating profit. Recent restructuring of the UK Custom Distribution (CD) business should support improved CD profitability in FY17. We have revised our FY17 forecasts to reflect the relative performance of the two divisions, but overall our FY17 normalised EPS forecast is unchanged. We introduce FY18 forecasts, reflecting 3.2% revenue and 5.2% normalised EPS growth y-o-y. Recent new business wins support the company’s medium-term growth targets. The company has funds of c £20m available for acquisitions – we expect to see further D&M acquisitions, which should have a positive effect on profitability and could expand the company’s presence outside Europe.

Valuation: Specialist focus drives performance

Over the last year the stock has declined 17%, suffering from the adverse effects of currency headwinds and weaker demand in the UK. It is now trading at a small discount to the peer group average on EV/EBITDA and P/E multiples. The company is well positioned for volume orders as economic conditions improve and, combined with the increased geographic coverage, integration benefits and cross-selling potential of recent acquisitions, should support revenue growth above market levels and further expansion of operating margins. The stock is supported by a dividend yield of 3%. In the medium term we expect to see improving operating margins drive earnings upside as Acal grows the proportion of revenue generated from design and manufacturing.

Investment summary
Company description: Supplier of customised electronics to industry

Acal is a leading international supplier of customised electronics to industry. Over the last seven years the company has broadened its product range, customer base and geographic presence via a series of acquisitions. The company offers value-added distribution and design and manufacturing services; the focus on differentiated products and expansion along the supply chain is helping the company to expand operating margins. The company intends to continue to grow organically and via acquisition while maintaining its focus on higher-margin business.

Financials: D&M shifting to majority of revenues

In FY16 revenues grew 6.1% y-o-y on a reported basis and 13.8% at constant exchange rates. On an underlying basis (pre-currency effects and acquisitions), the D&M business showed organic growth of 3% and the ongoing business in CD also grew 3%. Operating profit and normalised EPS came in ahead of our forecasts, with the underlying operating margin expanding from 4.9% in FY15 to 5.7% in FY16 as the higher margin D&M grew to nearly half of group revenues (51% once acquisitions are annualised). We leave our FY17 EPS forecast unchanged and introduce a forecast for 3.2% revenue growth and 5.2% normalised EPS growth in FY18.

Exhibit 1: Changes to forecasts

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016

16.5

17.8

7.8

14.5

15.2

4.8

19.6

19.8

0.9

2017e

18.4

18.4

0.0

16.7

16.5

(1.4)

22.8

22.4

(1.9)

2018e

N/A

19.3

N/A

N/A

17.7

N/A

N/A

23.7

N/A

Source: Acal, Edison Investment Research

Valuation: Specialist focus drives performance

Over the last year the stock has declined 17%, suffering from the adverse effects of currency headwinds and weaker demand in the UK. It is now trading at a small discount to the peer group on EV/EBITDA and P/E multiples. The company is well positioned for volume orders as economic conditions improve and, combined with the increased geographic coverage, integration benefits and cross-selling potential of recent acquisitions, should support revenue growth above market levels and further expansion of operating margins. The stock is supported by a dividend yield above 3%. In the medium term we expect to see improving operating margins driving earnings upside as Acal grows the proportion of revenue generated from design and manufacturing.

Sensitivities: Demand, currencies, acquisitions

Our estimates and Acal’s share price will be sensitive to the following factors. Customer demand: demand will be influenced by the economic environment in Europe and increasingly in North America and Asia. Currency: with 90% of underlying profits outside the UK, Acal is exposed to the translation of euro and Nordic-denominated subsidiary results into sterling, which negatively affected sales by 6% and profits by 8% in FY16. Pricing: Acal’s revenues and profitability are sensitive to its ability to include in price quotes engineering time spent on designing customer solutions. The company normally passes through supplier price increases. Acquisitions: Acal may make further acquisitions, which could add integration risk and will require funding. Pension deficit: Acal has a £4.9m pension deficit and, as agreed with the pension trustees in 2009, started increasing contributions from FY13 to reduce this (£1.6m in FY16).

Company description: Custom electronics supplier

Acal is a supplier of customised electronics to industry with operations throughout Europe and increasingly outside Europe. The last seven years have seen the integration of a series of acquisitions and a focus on growing the percentage of higher-margin specialist product, resulting in higher profitability. The company intends to continue to grow organically and via acquisitions while maintaining the focus on higher-margin business.

Company history

Acal was founded in 1986 and was admitted to the official list of the LSE in 1994 as a pure distributor of electronic components. After a change in management in 2009, the company has, through its strategy of specialisation, transitioned to become a provider of customised electronic solutions with operations in Europe, Asia, North America and South Africa. Acquisitions include BFi Optilas in 2009, CompoTRON, Hectronic and MTC Micro Tech Components (MTC) in 2011, Myrra Group, Young Electronics Group (YEG) and RSG in 2013, Noratel in 2014, Foss and Flux in 2015 and Contour and Plitron in 2016. The company now operates through two divisions: Custom Distribution (52% of FY16 revenues) and Design & Manufacturing (48% of FY16 revenues, forecast to exceed 50% in FY17), with 3,800 employees across 23 countries.

Group strategy

Management’s aim is to transform the company into a technology-led provider of customised electronics for industrial applications with design, manufacturing and distribution capabilities. To achieve this, the company has set the following strategic objectives:

move up the electronics value chain into the higher-margin design and manufacture of own products;

grow sales organically and well ahead of GDP by focusing on higher growth markets with above average growth prospects;

acquire high quality design & manufacture businesses with attractive growth prospects; and

develop sales internationally by further expansion into North America, both by following existing customers’ international needs and by developing local market sales.

To track progress with these objectives, the company has set KSIs (key strategic indicators) and KPIs (key financial performance indicators), which we discuss in more detail in this report.

Technical expertise adds value to specialist product range

Acal specialises in supplying technically demanding, bespoke electronics for industrial applications and has c 25,000 customers over a wide range of end-markets. The company estimates that the markets it operates in are worth c £4bn in Europe, c £6bn in North America and c £2bn in Asia. Acal mainly competes against small, privately owned, country-specific suppliers in one or multiple technology areas and expects to continue its active role in consolidating this fragmented market.

Mainly through acquisitions, the company has built up its Design and Manufacturing capability in four of the company’s five technology areas (see Exhibit 2). From this division, Acal supplies custom electronic products either designed uniquely or modified from an existing product. Products are manufactured in house (with principal facilities in China, India, Poland, and Sri Lanka) or via third-party contractors. Increasingly, these products are also distributed through Acal BFi.

The main business in Custom Distribution is Acal BFi, a specialist electronics supplier that differentiates itself from high-volume distributors such as Arrow or Avnet by supplying niche components from leading manufacturers in a wide range of electronic component areas. The products that the company supplies are often technically complex and therefore require more technical sales support, which Acal is able to provide (this is not always available from the product manufacturer or smaller local distributors). Acal solutions range from the recommendation and supply of a part, modification of an existing product or full design and development of a custom solution. A significant proportion of sales come from products that are either uniquely created for one customer and/or exclusively sourced.

Acal BFi aims to work with the leading suppliers for a given product or technology and seeks to supply products that are not supplied through other distribution channels. It currently has c 500 suppliers across a number of specialist areas, as shown in Exhibit 2. Additionally, the division has a separate medical business, Vertec, which supplies exclusively sourced medical imaging and radiotherapy products into medical and healthcare markets in the UK and South Africa.

Across both businesses, a customer will typically take six to 24 months to take a product from design to production, at which point the company could earn revenues for several years.

Exhibit 2: Product range by technology

Product area

Key products

Design and manufacture businesses

Communication & Sensors

RF components, fibre optic components, frequency control, wireless modules and systems, sensors and transducers, sensor assemblies, rotary signal transmitters.

Foss

Electromechanical

Cabling and assemblies, human interface components, military connectors, gaskets, EMC connector seals, springs, shields.

Contour, MTC, Stortech

Microsystems & Displays

Single board computers, server modules, system assemblies.

Hectronic

Imaging & Photonics

Infrared thermal imaging, radar, visible cameras, modules and software, lasers and diodes, optical-mechanics, optics, test and measurement.

Power & Magnetics

Standard and customisable power designs, magnetic components, electromagnetic and thermal interface.

Flux, Myrra, Noratel, Plitron, RSG

Source: Acal

Strategic progress update

Exhibit 3 summarises Acal’s progress against its KSIs. We discuss below how the company is meeting its strategic objectives.

Exhibit 3: Key strategic indicators (KSIs)

FY10

FY14

FY15

FY16

Mid-term target

Increase share of group revenue from Design & Manufacturing

c 5%

18%

37%

51%*

65%

Increase cross-selling

0%

2.7%

4%

5%

4-5%

Build sales beyond Europe

0%

5%

12%

17%

20%

Source: Acal. Note: *Annualised.

Moving up the electronics value chain

Acal started life as a pure distributor of electronic components, but through a strategy of specialisation and acquisition has transitioned to become a provider of customised electronic solutions. Recent acquisitions have added companies with design and manufacturing capabilities, which are significantly more profitable. The Design & Manufacturing division generated close to half of FY16 revenues and over three-quarters of FY16 profits. In FY17 we forecast that Design & Manufacturing will contribute 51% of sales and with organic growth higher than for Custom Distribution, we expect this proportion to continue to increase. In the Custom Distribution division, the company withdrew from selling non-specialist products in FY15, instead focusing on selling highly differentiated customised products. With Design & Manufacturing operating margins of 12.0% in FY16 compared to 3.1% for Custom Distribution, it is clear that this strategy should result in upward pressure on group operating margins.

Acquisitions transform the business

Acal started the transformation of the business in 2009 with the acquisition of BFi Optilas, the next largest European specialist distributor after Acal. This increased Acal’s presence in Germany, the UK, France and the Nordic region. Acal then proceeded to make a series of acquisitions (see Exhibit 4), the largest of which was Noratel for £71m in 2014. These are all companies where Acal has seen the opportunity to access design and manufacturing capability, to access new specialist technology areas or to return loss-making businesses to profitability using Acal’s scale. Acal has spent nearly £150m on acquisitions over the last seven years.

Integration strategy

Design and Manufacturing acquisitions typically continue to operate under their own brands and entrepreneurial management, with the advantage of being part of the larger Acal group (in terms of cost synergies, access to Acal’s distribution network for cross-selling and investment for growth). The Design & Manufacturing division currently operates through the following brands: Contour, Flux, Foss, Hectronic, MTC, Myrra, Noratel, Plitron, RSG, and Stortech.

Acal integrates Custom Distribution acquisitions into the Acal BFi brand. In such cases, the company typically integrates office and warehouse facilities, manufacturing, IT systems and makes use of group purchasing, freight and logistics.

Exhibit 4: Acquisition timeline

Company

Date

Product areas

Operations

Sales

Cost (£m)

BFi Optilas

Dec 09

Speciality components, communication, photonic, imaging

Germany, France, UK, Spain, Italy, Sweden, Netherlands

Europe

13.4

CompoTRON

Jan 11

Electronic communications & fibre optic components

Germany, UK, Denmark

Europe

7.1

Hectronic

Jun 11

Embedded computing

Sweden

Nordic region

1.2

MTC Micro Tech Consultants

Oct 11

Electro-magnetic shielding (own brand/manufacture)

Germany, S. Korea

Europe & Asia

2.7

Myrra SAS

Apr 13

Transformers, coils, cores & inductors (own brand/manufacture)

France, Poland, China

Europe, Asia, N.America, Africa

9.9

Young Electronics Group (YEG)

Sep 13

Solid state lighting, electronic components, power supplies, power cords, custom cable assembly

UK, Ireland

UK, Ireland

1.7

RSG

Nov 13

Custom power solutions

Germany

Germany

2.7

Noratel

Jul 14

Low, medium & high power transformers & inductors (own brand/manufacture)

Nordic region, China, US, India, Poland, Sri Lanka

Europe, Asia, North America

73.5

Foss

Jan 15

Customised fibre optic solutions

Norway, Slovakia

Norway, E. Europe

12

Flux

Nov 15

Customised magnetic components

Denmark, Thailand

Denmark

4

Contour

Jan 16

Custom cable assemblies and connectors

UK

UK

17.5

Plitron

Feb 16

Custom toroidal transformers

Canada

North America

1.8

Total

147.5

Source: Acal

Further acquisitions likely

Acquisitions remain a key part of the group strategy, with management considering two types of acquisition: “platform” to create a new position in a technology and/or geography and “bolt-on” to expand the position of an existing business. We would expect Acal to focus on acquisitions for the higher-margin Design & Manufacturing division, targeting companies active in developed markets that offer higher growth opportunities. We expect the company to consider targets in both Europe and North America. The company estimates it has access to funds of up to £20m for acquisitions.

Grow sales organically and well ahead of GDP

The company is taking a two-pronged approach to growing its revenues ahead of GDP on an organic basis:

by targeting markets that are growing faster than GDP; and

by promoting cross-selling within Acal BFi and across the rest of the group.

Targeting high growth markets

Looking at global GDP growth, the World Bank is forecasting annual growth of 3% to 2030, with developing markets expected to grow at 4.5% and emerging markets at 2%. In the shorter-term, the World Bank is forecasting global GDP growth of 2.4% in 2016, 2.8% in 2017 and 3.0% in 2018 (1.7%, 1.9% and 1.9% respectively for advanced economies). To generate growth ahead of GDP, the company is targeting end markets that look set to benefit from population growth and long-term technology trends. In FY16, the Design & Manufacturing division generated 48% of its revenues from these four areas:

Transportation: this includes road, rail and air travel. For example the growth in electric vehicles is increasing demand for electronics – as a supplier to Tesla for its charging points, Acal is already benefiting from this trend. As automotive manufacturers work towards creating autonomous vehicles, the technology content of cars will increase even further.

Medical: with an aging population and growing levels of comorbidity, healthcare spending continues to rise, with increasing amounts of technology used in diagnosing, monitoring and controlling medical conditions.

Renewable energy: the International Energy Authority forecasts that renewable energy will be the largest source of global power generation by 2030, mainly provided by solar, hydroelectric and wind technologies. Wind power is expected to account for 50% of the incremental power generated over this period. Through its Scandinavian acquisitions, Acal already has several wind turbine customers.

Connectivity: growth in device-to-device wireless connectivity (the internet of things (IoT)) is driving demand for electronics for industrial applications such as smart meters, remote asset management and predictive maintenance.

Cross-selling strategy

Acal’s product range encompasses five specialist technology areas – each technology group has a team of specialist sales and support engineers and their role is to identify customer opportunities. Through its design and manufacturing businesses and Custom Service centres (two in Germany, one in France and one in the UK), Acal is able to offer customers assistance with design (including prototyping and pre-testing for statutory approvals), assembly (including manufacturing, configuration and on-site installation) and lifecycle support. The company has initiatives in place to increase the level of cross-selling to existing customers. Cross-selling generated sales worth £14.2m in FY16 (FY15: £11.2m). Acal focuses on two key areas:

Cross-selling within Acal BFi: there are five technology groups in Acal BFi, with the majority of customers purchasing from only one or two groups. The group is focused on increasing cross-selling between these groups (FY16: £11.2m, FY15: £10.2m).

Cross-selling between sister companies: the group aims to introduce complementary products from other group companies to existing customers (FY16: £3m, FY15: £1m).

Develop sales internationally

In FY16, 17% of revenues were generated outside of Western Europe (up from 12% in FY15). Acal’s strategy is to support existing customers’ business outside Western Europe and to make further acquisitions that expand the group’s geographical coverage, such as the recent acquisition of Canadian-headquartered Plitron.

Sensitivities

Our estimates and the Acal share price will be sensitive to the following factors:

Customer demand: demand for the company’s products will be influenced by the economic environment in Europe. It will also be sensitive to the gain or loss of major customers, although in FY16 no customer made up more than 3% of sales.

Currency: translational – with 90% of profits outside the UK, Acal is exposed to the translation of euro and Nordic-denominated subsidiary results into sterling, which negatively affected sales by 6% and profits by c 8% in FY16. Transactional – Acal sells mainly in euros, sterling and Nordic currencies and purchases mainly in US dollars and euros. Acal hedges with forward contracts to the extent that the exposure cannot be passed to the customer.

Pricing: Acal’s revenues and profitability are sensitive to the company’s ability to include within price quotes engineering time spent on designing customer solutions. The company tends to pass through supplier price increases, with very few fixed-price contracts.

Acquisitions: the company may make further acquisitions, which could add integration risk and will require funding (for which we note Acal has up to £20m headroom in its debt facility).

Pension deficit: the company has a £4.9m pension deficit and increased the level of contributions from FY13 by 3% a year (FY16: £1.6m contribution) as part of the plan agreed with trustees back in 2009 to try to eliminate it. The pension fund was closed to new entrants in 1999 and further service accruals in 2000.

Supply chain: any major disruption of the supply chain could make it difficult for the company to satisfy customer demand and therefore affect revenues.

Financials
Review of FY16 results

Exhibit 5: FY16 results highlights

£m

FY16e

FY16a

Change

y-o-y

Revenues

294.9

287.7

-2.5%

6.1%

Gross margin

31.6%

32.2%

0.6%

1.1%

Underlying operating profit*

15.9

16.3

2.4%

21.6%

Underlying operating profit margin

5.4%

5.7%

0.3%

0.7%

Normalised operating profit**

16.7

17.0

1.7%

21.4%

Normalised operating margin

5.7%

5.9%

0.2%

0.7%

Normalised PBT

14.5

15.2

4.8%

22.6%

Normalised net income

11.1

11.8

6.2%

18.3%

Normalised diluted EPS (p)

16.5

17.8

7.8%

8.7%

Reported basic EPS (p)

10.1

11.4

13.0%

126.0%

Net debt

40.4

38.1

-5.6%

100.5%

Source: Acal, Edison Investment Research. Note: *Excludes exceptionals and amortisation of acquired intangibles. **As for underlying and also excludes share-based payments.

Acal reported FY16 revenues 2.5% below our forecast, although gross margins were higher and normalised operating profit was 1.7% above our forecast, resulting in a normalised operating margin of 5.9%, up from 5.2% a year ago. Net interest expense of £1.8m was lower than our £2.2m forecast, resulting in normalised EPS 7.8% ahead of our forecast. Net debt came in lower than forecast, mainly as a result of higher cash flow from operations. The company announced a full year dividend of 8.05p, ahead of our 7.98p forecast.

Exhibit 6 shows the split of revenues and operating profit by division. D&M revenues came in slightly ahead of our forecast, with operating profit 4.4% ahead, resulting in an operating margin of 12.0% compared to 11.3% a year ago. CD revenues were 4.8% below our forecast, while the UK business was weak, demand in continental Europe was strong. This dropped through to the operating profit level, reducing the operating margin to 3.1% compared to 3.9% a year ago. Unallocated costs were well-controlled and came in below our forecast. Overall, the stronger D&M profitability outweighed the weakness in CD to drive higher operating profitability than forecast.

Strong sterling masks underlying growth

In FY16 the strength of sterling versus the euro (+7% vs FY15) and the Nordic currencies (+9%) negatively affected reported revenue growth as highlighted in Exhibit 6. Based on constant exchange rates (CER), ie the FY16 rate applied to FY15, D&M grew 50% y-o-y, through a combination of acquisitions and 3% organic growth. CD declined 6.7% on a CER basis, although excluding the impact of one-off large contracts in FY15 and the discontinuation of non-specialist lines, underlying ongoing revenues grew 3% y-o-y.

Exhibit 6: Divisional results

£m

FY16a

FY16e

FY15a

FY15a CER

Reported y-o-y

CER y-o-y

Design & manufacturing (D&M)

137.6

137.4

101.3

92.0

35.8%

49.6%

Custom distribution (CD)

150.1

157.6

169.8

160.9

-11.6%

-6.7%

Group revenues

287.7

294.9

271.1

252.9

6.1%

13.8%

Operating profit

Design & manufacturing

16.5

15.8

11.4

10.4

44.7%

58.7%

Custom distribution

4.7

5.4

6.7

6.3

-29.9%

-25.4%

Unallocated*

(4.9)

(5.3)

(4.7)

(4.7)

4.3%

4.3%

Group operating profit

16.3

15.9

13.4

12.0

21.6%

35.8%

Operating margin

Design & manufacturing

12.0%

11.5%

11.3%

11.3%

0.7%

0.7%

Custom distribution

3.1%

3.4%

3.9%

3.9%

-0.8%

-0.8%

Group operating margin

5.7%

5.4%

4.9%

4.7%

0.7%

0.9%

Source: Acal, Edison Investment Research. Note: *Includes share-based payments, excludes exceptionals and acquired amortisation.

Progress versus KPIs

The company continues to make good progress towards its medium term KPI targets.

Exhibit 7: Key performance indicators (KPIs)

FY14

FY15

FY16

Average

Mid-term target

Organic sales growth

2%

3%

3%*

3%

Well ahead of GDP

Increase underlying operating margin

3.4%

4.9%

5.7%

7%

Attractive ROTCE

24%

24%

23%

23.3%

>25%

Generate strong free cash flow

86%

76%

70%

77%

>75% of PBT

Generate long-term value for shareholders (3 yr TSR)**

5%

101%

62%

Upper quartile

Percentile (vs FTSE small cap index)

71st

20th

22nd

Upper quartile

Source: Acal. Note: *Ongoing sales. ** Growth over the last three years.

Outlook improving

Acal’s solutions are used in both the design and production phases of a customer’s product. The company works with R&D engineers to help them develop new products; once these move into production, Acal supplies on a volume basis for the life of the product. Design activity tends to be technology driven, whereas production activity is more geared to general economic conditions. The manufacturing PMI indices are useful indicators of the health of the industrial sector. Exhibit 8 shows the movement in the manufacturing PMI for the eurozone, France, Germany, the UK and the US since the start of 2014. Several factors, including Brexit and the US elections, have created uncertainty and hence impacted confidence, as evidenced by the most recent data.

The company expects challenging trading conditions to continue through H117; however, recent customer project activity gives management confidence that it will see improved demand in H217. In H216, the company won a number of new large contracts which are expected to generate revenues from the end of FY17. At year end, the order book stood at £85m.

Exhibit 8: PMI data, January 2014 to May 2016

Source: Markit Economics

Changes to forecasts

We summarise the changes to FY17 forecasts below and introduce FY18 forecasts. We have reduced our forecast for CD revenues in FY17, although we expect the recent restructuring of the UK CD business to drive improved CD operating margins in FY17 (3.4% vs 3.1% in FY16). The reduction in FY17 normalised operating profit is offset by slightly lower interest costs and lower dilutive share count. We forecast 3.2% revenue growth in FY18, with D&M showing stronger growth than CD and a small increase in the underlying operating margin to 6.2% (compared to the medium term target of 7%). Our dividend forecasts fall within the company’s target range of 2-3x cover. By the end of FY18, we forecast a net debt/adjusted EBITDA ratio of 1.5x (management’s target: 1.5-2.0x).

Exhibit 9: Changes to estimates

£m

FY17e old

FY17e new

Change

y-o-y

FY18e new

y-o-y

Revenues

317.9

309.8

-2.6%

7.7%

319.6

3.2%

Custom distribution

159.2

150.8

-5.3%

0.5%

153.0

1.5%

Design & manufacturing

158.8

159.0

0.2%

15.6%

166.5

4.7%

Gross margin

31.6%

32.8%

1.2%

0.6%

32.8%

0.0%

Underlying operating profit

19.1

18.7

-2.3%

14.4%

19.9

6.9%

Underlying operating profit margin

6.0%

6.0%

0.0%

0.4%

6.2%

0.2%

Normalised operating profit

19.9

19.5

-2.2%

14.4%

20.7

6.6%

Normalised operating margin

6.3%

6.3%

0.0%

0.4%

6.5%

0.2%

Normalised PBT

16.7

16.5

-1.4%

8.2%

17.7

7.8%

Normalised net income

12.7

12.5

-1.4%

6.0%

13.4

6.8%

Normalised EPS (p)

18.4

18.4

0.0%

3.1%

19.3

5.2%

Reported EPS (p)

12.5

11.7

-6.9%

2.5%

13.2

12.8%

Dividend per share (p)

8.3

8.3

0.0%

3.1%

8.5

2.4%

Net (debt)/cash

(39.6)

(38.1)

-3.8%

0.1%

(35.4)

-7.2%

Source: Edison Investment Research

 

Valuation

Exhibit 10 shows valuation metrics for Acal’s peer group and Exhibit 11 shows their financial performance. Over the last year, the stock has declined 17%, affected by currency headwinds and weaker demand in the UK. The stock is now trading at a small discount to the peer group average on EV/EBITDA and P/E multiples. The company is well positioned for volume orders as economic conditions improve and, combined with the increased geographic coverage, integration benefits and cross-selling potential of recent acquisitions, this should support revenue growth above market levels and further expansion of operating margins. As Acal increases the proportion of revenues generated from D&M, we would expect to see meaningful increases in operating margins, which should flow through to the earnings level. Design & Manufacturing made up 48% of FY16 revenues and we forecast this will increase to 51% in FY17. XP Power is an example of a distribution company that progressively increased its levels of design and manufacture, with operating margins growing from 6.6% in 2003 (when 51% of revenues were generated from distribution of third-party products) to 23.6% in 2015 (when 96% of revenues were from own-branded products and 68% manufactured in house).

Exhibit 10: Valuation multiples

 

EV/Sales

EV/EBITDA

P/E

Dividend yield

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Acal (2)

0.7

0.7

0.6

10.2

9.1

8.5

14.3

13.9

13.2

3.1%

3.2%

3.3%

Specialist distributors

Diploma (4)

2.3

2.2

2.1

12.6

11.8

11.2

18.7

17.4

16.5

2.6%

2.8%

2.9%

Solid State (2)

0.7

0.7

7.6

7.3

10.1

9.8

3.4%

3.4%

0.0%

High service & commodity distributors

Brammer (5)

0.5

0.5

0.5

8.1

8.3

7.5

12.9

12.7

11.0

5.6%

5.6%

5.7%

Electrocomponents (2)

1.1

1.1

1.0

13.0

11.4

10.4

23.0

19.9

17.5

4.0%

4.0%

4.0%

Premier Farnell (1)

0.7

0.7

0.7

8.8

8.2

7.6

10.4

11.0

9.5

7.5%

5.4%

5.5%

Design & manufacturing

E2V (2)

2.0

1.8

1.7

8.8

8.0

7.4

14.2

13.6

12.6

2.5%

2.7%

3.0%

Gooch & Housego (4)

2.5

2.4

2.3

12.0

11.3

10.6

22.8

21.5

20.6

1.0%

1.1%

1.2%

XP Power (5)

2.8

2.5

2.4

10.5

10.0

9.1

15.5

15.3

13.9

4.1%

4.3%

4.5%

Average

1.6

1.5

1.5

10.2

9.5

9.1

15.9

15.2

14.5

3.8%

3.7%

3.3%

Source: Thomson, Edison Investment Research. Note: (1) y/e 31 January; (2) y/e 31 March; (3) y/e 30 June; (4) y/e 30 September; (5) y/e 31 December.

Exhibit 11: Financial performance

 

Gross margin

EBITDA margin

EBIT margin

Revenue growth

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Last yr

This yr

Next yr

Acal (2)

32.2%

32.8%

32.8%

6.9%

7.2%

7.4%

5.9%

6.3%

6.5%

6.1%

7.7%

3.2%

Specialist distributors

Diploma (4)

36.0%

36.0%

36.0%

18.3%

18.4%

18.5%

16.0%

16.3%

16.1%

11.6%

6.0%

4.0%

Solid State (2)

35.6%

34.1%

8.7%

9.2%

7.5%

7.9%

20.4%

-0.9%

High service & commodity distributors

Brammer (5)

30.9%

31.1%

31.6%

6.0%

5.8%

6.3%

4.7%

4.3%

4.7%

-0.9%

1.0%

2.4%

Electrocomponents (2)

43.5%

43.3%

43.2%

8.6%

9.4%

9.9%

6.4%

7.1%

7.7%

2.0%

5.2%

3.9%

Premier Farnell (1)

34.5%

33.4%

33.1%

7.8%

8.6%

9.0%

7.4%

6.4%

7.0%

2.4%

-3.2%

3.6%

Design & manufacturing

E2V (2)

40.3%

41.1%

41.4%

22.4%

22.7%

23.2%

17.8%

18.0%

18.4%

5.5%

8.8%

5.6%

Gooch & Housego (4)

40.0%

41.0%

42.0%

20.8%

21.1%

21.8%

16.8%

17.0%

17.2%

4.4%

4.5%

3.7%

XP Power (5)

49.8%

50.0%

50.2%

27.1%

25.5%

26.4%

23.6%

22.3%

23.2%

8.5%

11.4%

6.1%

Average

37.8%

37.8%

39.3%

15.0%

15.1%

16.4%

12.5%

12.4%

13.5%

6.7%

4.1%

4.2%

Source: Thomson, Edison Investment Research. Note: (1) y/e 31 January; (2) y/e 31 March; (3) y/e 30 June; (4) y/e 30 September; (5) y/e 31 December.

Exhibit 12: Financial summary

£m

2011

2012

2013

2014

2015

2016

2017e

2018e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

264.8

257.8

177.4

211.6

271.1

287.7

309.8

319.6

Cost of Sales

(189.6)

(179.9)

(123.0)

(148.6)

(186.7)

(195.1)

(208.2)

(214.8)

Gross Profit

75.2

77.9

54.4

63.0

84.4

92.6

101.6

104.8

EBITDA

 

 

9.1

10.2

7.4

9.1

16.6

19.8

22.4

23.7

Operating Profit (before am, SBP and except.)

7.7

8.7

6.1

7.7

14.0

17.0

19.5

20.7

Operating Profit (before am. and except.)

 

7.4

8.1

5.5

7.1

13.4

16.3

18.7

19.9

Amortisation of acquired intangibles

(0.3)

(0.8)

(0.7)

(1.0)

(2.1)

(2.8)

(3.2)

(3.2)

Exceptionals

(4.6)

(3.4)

(3.4)

(0.9)

(5.2)

(2.1)

(2.2)

(2.2)

Share-based payments

(0.3)

(0.6)

(0.6)

(0.6)

(0.6)

(0.7)

(0.8)

(0.8)

Operating Profit

2.5

3.9

1.4

5.2

6.1

11.4

13.3

14.5

Net Interest

(0.3)

(0.9)

(0.5)

(0.8)

(1.6)

(1.8)

(3.0)

(3.0)

Profit Before Tax (norm)

 

 

7.4

7.8

5.6

6.9

12.4

15.2

16.5

17.7

Profit Before Tax (FRS 3)

 

 

1.9

2.7

0.7

4.2

4.3

9.4

10.1

11.3

Tax

(0.2)

(0.6)

1.4

(0.5)

(1.4)

(2.2)

(2.6)

(2.9)

Profit After Tax (norm)

5.8

6.4

4.6

6.0

10.0

11.8

12.5

13.4

Profit After Tax (FRS 3)

1.7

2.1

2.1

3.7

2.9

7.2

7.5

8.4

Average Number of Shares Outstanding (m)

39.1

39.2

39.2

43.1

57.6

63.3

64.2

64.2

EPS - normalised & diluted (p)

 

 

14.2

15.7

11.3

13.1

16.4

17.8

18.4

19.3

EPS - IFRS basic (p)

 

 

4.3

5.4

(4.8)

3.0

5.0

11.4

11.7

13.2

EPS - IFRS diluted (p)

 

 

4.2

5.1

(4.7)

2.8

4.8

10.9

11.0

12.2

Dividend per share (p)

5.4

5.8

6.2

6.8

7.6

8.1

8.3

8.5

Gross Margin (%)

28.4

30.2

30.7

29.8

31.1

32.2

32.8

32.8

EBITDA Margin (%)

3.4

4.0

4.2

4.3

6.1

6.9

7.2

7.4

Operating Margin (before am, SBP and except.) (%)

2.9

3.4

3.4

3.6

5.2

5.9

6.3

6.5

BALANCE SHEET

Fixed Assets

 

 

27.7

32.5

30.9

33.1

88.6

108.4

104.8

101.5

Intangible Assets

21.1

25.7

24.2

25.5

69.9

88.2

84.9

81.6

Tangible Assets

3.8

3.5

3.1

3.5

13.8

14.7

14.4

14.4

Deferred tax assets

2.8

3.3

3.6

4.1

4.9

5.5

5.5

5.5

Current Assets

 

 

98.3

86.8

81.8

92.7

127.3

128.3

136.1

142.6

Stocks

25.3

25.7

19.3

19.4

39.8

42.9

45.8

47.3

Debtors

59.3

48.8

44.7

48.3

60.2

65.5

70.4

72.7

Cash

13.6

12.3

17.8

18.1

26.7

19.9

19.9

22.6

Current Liabilities

 

 

(63.9)

(58.8)

(50.9)

(58.3)

(62.1)

(61.7)

(72.2)

(79.2)

Creditors

(58.8)

(53.6)

(46.6)

(51.5)

(61.9)

(60.9)

(66.4)

(68.4)

Short term borrowings

(5.1)

(5.2)

(4.3)

(6.8)

(0.2)

(0.8)

(5.8)

(10.8)

Long Term Liabilities

 

 

(10.8)

(11.4)

(10.3)

(19.0)

(61.1)

(73.1)

(68.1)

(63.1)

Long term borrowings

(1.8)

(0.8)

(1.7)

(9.5)

(45.5)

(57.2)

(52.2)

(47.2)

Other long term liabilities

(9.0)

(10.6)

(8.6)

(9.5)

(15.6)

(15.9)

(15.9)

(15.9)

Net Assets

 

 

51.3

49.1

51.5

48.5

92.7

101.9

100.7

101.8

CASH FLOW

Operating Cash Flow

 

 

0.5

9.1

5.7

6.1

6.6

14.6

18.2

20.3

Net Interest

(0.3)

(0.9)

(0.6)

(0.8)

(1.6)

(1.8)

(3.0)

(3.0)

Tax

0.5

(1.1)

(1.4)

(0.9)

(3.3)

(4.3)

(4.4)

(4.9)

Capex

(1.3)

(1.4)

(1.3)

(1.4)

(2.5)

(2.3)

(2.5)

(2.9)

Acquisitions/disposals

(4.4)

(3.9)

(0.5)

(9.2)

(37.3)

(19.8)

(3.2)

(1.5)

Financing

0.0

0.3

5.7

0.1

52.7

0.0

0.0

0.0

Dividends

(2.0)

(2.2)

(2.3)

(2.7)

(3.6)

(4.9)

(5.2)

(5.3)

Net Cash Flow

(7.0)

(0.1)

5.3

(8.8)

11.0

(18.5)

(0.0)

2.8

Opening net cash/(debt)

 

 

13.9

6.7

6.3

11.8

1.8

(19.0)

(38.1)

(38.1)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

(0.2)

(0.3)

0.2

(1.2)

(31.8)

(0.6)

0.0

(0.0)

Closing net cash/(debt)

 

 

6.7

6.3

11.8

1.8

(19.0)

(38.1)

(38.1)

(35.4)

Source: Acal, Edison Investment Research

Contact details

Revenue by geography

2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH +44 (0)1483 544500 www.acalplc.co.uk

Contact details

2 Chancellor Court, Occam Road, Surrey Research Park, Guildford GU2 7AH +44 (0)1483 544500 www.acalplc.co.uk

Revenue by geography

Management team

CEO: Nick Jefferies

CFO: Simon Gibbins

Nick joined Acal as group chief executive in January 2009. He has held senior positions for over 15 years with leading international distributors of electronic components and computer products, such as Electrocomponents and Arrow Electronics. He originally trained as an electronics design engineer with Racal Defence (now part of Thales).

Simon was appointed as group finance director in July 2010. A chartered accountant, he was previously global head of finance and deputy CFO at Shire. Before joining Shire in 2000, he spent six years with ICI in various senior finance roles, both in the UK and overseas. His earlier career was spent with Coopers & Lybrand in London.

Chairman: Richard Moon

Richard joined the board in September 2004 and became chairman in April 2005. Formerly a director of Racal Electronics, CEO of Thales and non-executive chairman of Planit Holdings and OBS Medical, he now holds the position of non-executive chairman of Seven Technologies Holdings and chairman of Synergie Business.

Management team

CEO: Nick Jefferies

Nick joined Acal as group chief executive in January 2009. He has held senior positions for over 15 years with leading international distributors of electronic components and computer products, such as Electrocomponents and Arrow Electronics. He originally trained as an electronics design engineer with Racal Defence (now part of Thales).

CFO: Simon Gibbins

Simon was appointed as group finance director in July 2010. A chartered accountant, he was previously global head of finance and deputy CFO at Shire. Before joining Shire in 2000, he spent six years with ICI in various senior finance roles, both in the UK and overseas. His earlier career was spent with Coopers & Lybrand in London.

Chairman: Richard Moon

Richard joined the board in September 2004 and became chairman in April 2005. Formerly a director of Racal Electronics, CEO of Thales and non-executive chairman of Planit Holdings and OBS Medical, he now holds the position of non-executive chairman of Seven Technologies Holdings and chairman of Synergie Business.

Principal shareholders

(%)

Hargreave Hale Investment Management

18.4

Aberdeen Group

13.8

Unicorn Asset Management (UK)

7.7

Legal & General Investment Management Ltd (UK)

6.6

BlackRock Inc

5.0

AXA Investment Managers UK

4.2

River & Mercantile Asset Management

4.0

Companies named in this report

Brammer (BRAM), Diploma (DPLM), Electrocomponents (ECM), Gooch & Housego (GHH), Premier Farnell (PFL), XP Power (XPP)

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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