Acal |
High-margin UK custom cabling acquisition |
Acquisition |
Industrial support services |
15 January 2016 |
Share price performance
Business description
Next event
Analysts
Acal is a research client of Edison Investment Research Limited |
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Acal has boosted its Design & Manufacturing (D&M) business with the acquisition of Contour Electronics for an initial consideration of £17m. The UK-based custom cabling and connector business is forecast to grow revenues, further boosting D&M’s profitability. In addition, there is potential upside from cross-selling to Acal’s international customer base.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/14 |
211.6 |
6.9 |
13.1 |
6.80 |
21.2 |
2.5 |
03/15 |
271.1 |
12.4 |
16.4 |
7.60 |
16.9 |
2.7 |
03/16e |
294.9 |
14.5 |
16.5 |
7.98 |
16.8 |
2.9 |
03/17e |
317.9 |
16.7 |
18.4 |
8.30 |
15.1 |
3.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Acquisition of Contour Electronics
Acal has acquired Contour Electronics, a UK-based designer and manufacturer of custom cabling and connector products. Contour has a manufacturing facility in the UK for low-volume production and outsources higher volumes to Asian partners. The acquisition doubles Acal’s revenues in this area. The company has paid cash of £14m and issued shares worth £3m. Further consideration of £1m is payable in April 2019 (subject to certain conditions) and additional contingent consideration of up to £6m is payable after July 2019 if the business hits its own strong growth targets. In the year to 30 June 2015, Contour generated revenues of £10.7m and PBT of £1.1m (or £1.8m adjusted for exceptional and shareholder payments, equivalent to a 16.8% margin). Based on initial consideration, this values this growth business on a trailing P/E of c 11.8x.
Growth business with strong margins
According to management, Contour has exhibited good growth over a number of years and is targeting continued growth. We estimate that with Contour’s contribution the ongoing mix of revenues between Custom Distribution and D&M will be roughly equal. We raise our FY16 revenue forecast by 0.9%, operating profit by 2.7% and EPS by 0.6%. For FY17, we lift revenues by 3.6% and the impact of Contour’s higher margin business (we estimate c 17% operating margins) drives operating profit up by 10.4% and EPS by 3.7%. Our net debt forecast increases to £40.4m by the end of FY16 and £39.6m by the end of FY17 (equivalent to net debt/EBITDA of 1.7x), leaving some £20m headroom for further acquisitions.
Valuation: Growth of D&M drives upside
The stock is trading on a P/E of 16.8x FY16e and 15.1x FY17e, in line with its peer group. The company continues to make good progress in its strategy to move up the value chain and in the medium term, as Acal grows the proportion of revenue generated from D&M, we expect to see further operating margin expansion. In addition to the wider geographic coverage and cross-selling potential of recent acquisitions, we see scope for further share price upside from additional value-enhancing acquisitions. The stock is supported by a dividend yield of c 3%.
Exhibit 1: Financial summary
£m |
2011 |
2012 |
2013 |
2014 |
2015 |
2016e |
2017e |
|||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
264.8 |
257.8 |
177.4 |
211.6 |
271.1 |
294.9 |
317.9 |
|
Cost of Sales |
(189.6) |
(179.9) |
(123.0) |
(148.6) |
(186.7) |
(201.8) |
(217.5) |
|||
Gross Profit |
75.2 |
77.9 |
54.4 |
63.0 |
84.4 |
93.2 |
100.5 |
|||
EBITDA |
|
|
9.1 |
10.2 |
7.4 |
9.1 |
16.6 |
19.6 |
22.8 |
|
Operating Profit (before am, SBP and except.) |
7.7 |
8.7 |
6.1 |
7.7 |
14.0 |
16.7 |
19.9 |
|||
Operating Profit (before am. and except.) |
|
7.4 |
8.1 |
5.5 |
7.1 |
13.4 |
15.9 |
19.1 |
||
Amortisation of acquired intangibles |
(0.3) |
(0.8) |
(0.7) |
(1.0) |
(2.1) |
(2.6) |
(2.6) |
|||
Exceptionals |
(4.6) |
(3.4) |
(3.4) |
(0.9) |
(5.2) |
(2.3) |
(2.2) |
|||
Share-based payments |
(0.3) |
(0.6) |
(0.6) |
(0.6) |
(0.6) |
(0.8) |
(0.8) |
|||
Operating Profit |
2.5 |
3.9 |
1.4 |
5.2 |
6.1 |
11.0 |
14.3 |
|||
Net Interest |
(0.3) |
(0.9) |
(0.5) |
(0.8) |
(1.6) |
(2.2) |
(3.2) |
|||
Profit Before Tax (norm) |
|
|
7.4 |
7.8 |
5.6 |
6.9 |
12.4 |
14.5 |
16.7 |
|
Profit Before Tax (FRS 3) |
|
|
1.9 |
2.7 |
0.7 |
4.2 |
4.3 |
8.5 |
10.8 |
|
Tax |
(0.2) |
(0.6) |
1.4 |
(0.5) |
(1.4) |
(2.1) |
(2.8) |
|||
Profit After Tax (norm) |
5.8 |
6.4 |
4.6 |
6.0 |
10.0 |
11.2 |
12.7 |
|||
Profit After Tax (FRS 3) |
1.7 |
2.1 |
2.1 |
3.7 |
2.9 |
6.4 |
8.0 |
|||
Average Number of Shares Outstanding (m) |
39.1 |
39.2 |
39.2 |
43.1 |
57.6 |
63.3 |
64.1 |
|||
EPS - normalised & diluted (p) |
|
|
14.2 |
15.7 |
11.3 |
13.1 |
16.4 |
16.5 |
18.4 |
|
EPS - IFRS basic (p) |
|
|
4.3 |
5.4 |
(4.8) |
3.0 |
5.0 |
10.1 |
12.5 |
|
EPS - IFRS diluted (p) |
|
|
4.2 |
5.1 |
(4.7) |
2.8 |
4.8 |
9.5 |
11.6 |
|
Dividend per share (p) |
5.4 |
5.8 |
6.2 |
6.8 |
7.6 |
8.0 |
8.3 |
|||
Gross Margin (%) |
28.4 |
30.2 |
30.7 |
29.8 |
31.1 |
31.6 |
31.6 |
|||
EBITDA Margin (%) |
3.4 |
4.0 |
4.2 |
4.3 |
6.1 |
6.7 |
7.2 |
|||
Operating Margin (before am, SBP and except.) (%) |
2.9 |
3.4 |
3.4 |
3.6 |
5.2 |
5.7 |
6.3 |
|||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
27.7 |
32.5 |
30.9 |
33.1 |
88.6 |
107.8 |
105.6 |
|
Intangible Assets |
21.1 |
25.7 |
24.2 |
25.5 |
69.9 |
88.8 |
86.2 |
|||
Tangible Assets |
3.8 |
3.5 |
3.1 |
3.5 |
13.8 |
14.1 |
14.5 |
|||
Deferred tax assets |
2.8 |
3.3 |
3.6 |
4.1 |
4.9 |
4.9 |
4.9 |
|||
Current Assets |
|
|
98.3 |
86.8 |
81.8 |
92.7 |
127.3 |
115.0 |
124.2 |
|
Stocks |
25.3 |
25.7 |
19.3 |
19.4 |
39.8 |
43.6 |
47.0 |
|||
Debtors |
59.3 |
48.8 |
44.7 |
48.3 |
60.2 |
65.5 |
70.5 |
|||
Cash |
13.6 |
12.3 |
17.8 |
18.1 |
26.7 |
5.3 |
6.1 |
|||
Current Liabilities |
|
|
(63.9) |
(58.8) |
(50.9) |
(58.3) |
(62.1) |
(72.7) |
(83.1) |
|
Creditors |
(58.8) |
(53.6) |
(46.6) |
(51.5) |
(61.9) |
(67.5) |
(72.9) |
|||
Short term borrowings |
(5.1) |
(5.2) |
(4.3) |
(6.8) |
(0.2) |
(5.2) |
(10.2) |
|||
Long Term Liabilities |
|
|
(10.8) |
(11.4) |
(10.3) |
(19.0) |
(61.1) |
(57.1) |
(52.1) |
|
Long term borrowings |
(1.8) |
(0.8) |
(1.7) |
(9.5) |
(45.5) |
(40.5) |
(35.5) |
|||
Other long term liabilities |
(9.0) |
(10.6) |
(8.6) |
(9.5) |
(15.6) |
(16.6) |
(16.6) |
|||
Net Assets |
|
|
51.3 |
49.1 |
51.5 |
48.5 |
92.7 |
93.0 |
94.6 |
|
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
0.5 |
9.1 |
5.7 |
6.1 |
6.6 |
13.0 |
18.0 |
|
Net Interest |
(0.3) |
(0.9) |
(0.6) |
(0.8) |
(1.6) |
(2.2) |
(3.2) |
|||
Tax |
0.5 |
(1.1) |
(1.4) |
(0.9) |
(3.3) |
(3.9) |
(4.5) |
|||
Capex |
(1.3) |
(1.4) |
(1.3) |
(1.4) |
(2.5) |
(3.0) |
(3.3) |
|||
Acquisitions/disposals |
(4.4) |
(3.9) |
(0.5) |
(9.2) |
(37.3) |
(20.4) |
(1.2) |
|||
Financing |
0.0 |
0.3 |
5.7 |
0.1 |
52.7 |
0.0 |
0.0 |
|||
Dividends |
(2.0) |
(2.2) |
(2.3) |
(2.7) |
(3.6) |
(4.9) |
(5.1) |
|||
Net Cash Flow |
(7.0) |
(0.1) |
5.3 |
(8.8) |
11.0 |
(21.4) |
0.7 |
|||
Opening net cash/(debt) |
|
|
13.9 |
6.7 |
6.3 |
11.8 |
1.8 |
(19.0) |
(40.4) |
|
HP finance leases initiated |
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) |
0.0 |
0.0 |
|||
Closing net cash/(debt) |
|
|
6.7 |
6.3 |
11.8 |
1.8 |
(19.0) |
(40.4) |
(39.6) |
|
Source: Acal, Edison Investment Research
|
Research: Metals & Mining
Rare Earth Minerals