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Last close As at 26/05/2023
GBP7.84
▲ 1.00 (0.13%)
Market capitalisation
GBP755m
Acal |
Adding sensors to the Design & Manufacturing portfolio |
Acquisition and fund raising |
Industrial support services |
26 January 2017 |
Share price performance
Business description
Next events
Analysts
Acal is a research client of Edison Investment Research Limited |
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Acal’s acquisition of Variohm adds the first specialist sensor business to Design & Manufacturing and moves the company closer to its mid-term target of generating 75% of revenues from the division. The acquisition, costing up to £13.85m in cash, is being funded by the recent placing of 6.42m shares at 220p per share. Management expects the deal, together with the placing, to be earnings enhancing in FY18 and we lift our normalised FY18e EPS forecast by 3.4%. The stock is trading at a c 30% discount to its peer group, representing a good entry point in our view.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/14 |
211.6 |
6.9 |
13.1 |
6.8 |
17.8 |
2.9 |
03/15 |
271.1 |
12.4 |
16.4 |
7.6 |
14.2 |
3.3 |
03/16 |
287.7 |
15.2 |
17.8 |
8.1 |
13.1 |
3.5 |
03/17e |
326.0 |
16.8 |
18.4 |
8.4 |
12.7 |
3.6 |
03/18e |
353.3 |
20.0 |
20.0 |
8.5 |
11.7 |
3.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Design & Manufacturing acquisition; fund raising
Acal has acquired Variohm Holdings for an initial cash consideration of £12m and a contingent cash consideration of up to £1.85m. It funded the deal from its syndicated debt facility, which it will repay with the £13.6m in net proceeds from the recent placing of 6.42m shares at 220p per share. Variohm is a UK-based designer, manufacturer and distributor of specialist electronic sensors, switches and motion measurement systems, with c 50% of sales from France, Germany and the US.
Trading in line, upgrade to forecasts
The company also provided an update on trading, with pre-deal earnings expectations unchanged for FY17. Order intake increased 4% y-o-y in Q317 (on a constant currency organic basis) and organic constant currency revenues were flat with the expectation of revenue growth in Q417. We have revised our forecasts to take into account the acquisition and fund-raising. Our revenue forecasts increase 1.3% in FY17e and 6.6% in FY18e. Our normalised EPS forecast is essentially unchanged in FY17e and increases 3.4% in FY18e. We estimate that gearing will reduce to 1.6x by the end of FY18 (down from our previous 1.7x estimate).
Valuation: D&M progress to drive upside
On our revised forecasts, the stock is trading at a c 30% discount to the peer group average on EV/EBITDA and P/E multiples. The trading update indicating unchanged expectations for the remainder of FY17 combined with further progress in the strategy to grow the Design & Manufacturing side of the business provide confidence in both the near-term and longer-term outlook for the company. Continued growth in the proportion of revenue generated from design and manufacturing should support operating margin expansion, and should help to reduce the valuation discount. The stock is supported by a dividend yield above 3%.
Overview of Variohm acquisition
Variohm background
Variohm was founded by Roy Moffatt in 1974. It designs, manufactures and distributes sensors, switches and motion measurement systems. It has three own brands: Variohm Eurosensors, Herga and Heason. The company is based in the UK, with offices and manufacturing facilities in Towcester, Bury St Edmunds and Slinfold, as well as a sales office in Germany. The company works closely with customers to design solutions, and supplies third-party products as well as in-house manufactured products. Medical, transportation and industrial customers generate c 65% of sales; 50% of revenues are generated in the UK, with a further 50% sold to France, Germany and the US.
Financial performance
Exhibit 1 shows the financial performance of the company over the last three years. According to Acal, the business continues to grow in the current fiscal year. We would expect the EBITDA margin to improve once part of Acal as the business should be able to take advantage of central services and purchasing.
Exhibit 1: Variohm financial performance, FY14-16 (£m)
Year end 30 April |
FY14 |
FY15 |
FY16 |
Revenue |
18.3 |
18.5 |
19.4 |
Revenue growth |
1.1% |
4.9% |
|
EBITDA |
1.2 |
1.4 |
2.0 |
EBITDA margin |
6.6% |
7.6% |
10.3% |
PBT |
1.6 |
||
PBT margin |
8.2% |
Source: Acal
Terms of the deal
Acal has paid an initial consideration of £12m in cash and will pay up to £1.85m in contingent cash consideration in FY19 based on targets set for FY18. The deal is on a cash-free, debt-free basis.
Based on the initial consideration, the business is valued at 6x trailing EBITDA, compared to Acal’s trailing EV/EBITDA of 9.4x and FY17e EV/EBITDA of 8.3x on pre-deal forecasts.
Funding the deal
The company has funded the acquisition through its syndicated debt facility. The company placed 6.418m shares at 220p per share on 20 January for gross proceeds of £14.1m and net proceeds of £13.6m. It will use these proceeds to repay the acquisition funding and to fund working capital and the contingent consideration.
Integration into Acal
Variohm will be integrated into Acal’s Design & Manufacturing division. While Acal’s Custom Distribution business supplies sensor products, this will be the first design and manufacturing business in this area. Connectivity is one of Acal’s four focus markets, and the addition of in-house sensor capability should help the company to support customers active in the Internet of Things (IoT) market. The management team will be retained and the products will continue to be sold under the existing brands. We would expect cross-selling to be a focus, and a potential widening of exports to other countries.
Trading update
Acal has also provided information on trading in Q317. For 1 October 2016 to 31 December 2016, trading was in line with expectations. Revenues grew 21% y-o-y in Q317, and 5% at constant exchange rates. Organic revenues (at constant exchange rates) were flat on a year-on-year basis, compared to -7% in H117, and the company expects to return to growth in Q417. Orders increased 4% at constant exchange rates. Gross margins held up and were higher than a year ago (H216 32.8%; our forecast for H217 is 33.0%). Management maintains earnings expectations for FY17. Net debt at the end of Q317 stood at £41.1m, flat versus end H117.
Changes to forecasts
We have reflected the acquisition of Variohm and the share issue. The company expects the deal to be earnings enhancing in the first full year after acquisition ie FY18. We estimate that Design & Manufacturing will contribute 56% of revenues in FY18 (up from 53%), helping drive up operating margins for the group. We estimate that the combination of the acquisition and the placing will reduce gearing.
Exhibit 2: Changes to estimates
£m |
FY17e old |
FY17e new |
Change |
y-o-y |
FY18e old |
FY18e new |
Change |
y-o-y |
Revenues |
321.7 |
326.0 |
1.3% |
13.3% |
331.3 |
353.3 |
6.6% |
8.4% |
Custom distribution |
153.1 |
153.1 |
0.0% |
2.0% |
155.4 |
155.4 |
0.0% |
1.5% |
Design & manufacturing |
168.6 |
172.9 |
2.5% |
25.6% |
175.8 |
197.8 |
12.5% |
14.4% |
Gross margin |
33.0% |
33.0% |
0.0% |
0.8% |
33.0% |
33.0% |
0.0% |
0.0% |
Underlying operating profit |
18.7 |
19.1 |
2.1% |
17.0% |
19.9 |
22.2 |
11.2% |
16.2% |
Underlying operating profit margin |
5.8% |
5.9% |
0.0% |
0.2% |
6.0% |
6.3% |
0.3% |
0.4% |
Normalised operating profit |
19.4 |
19.8 |
2.0% |
16.3% |
20.7 |
23.0 |
10.8% |
16.2% |
Normalised operating margin |
6.0% |
6.1% |
0.0% |
0.2% |
6.3% |
6.5% |
0.2% |
0.4% |
Normalised PBT |
16.4 |
16.8 |
2.4% |
10.4% |
17.7 |
20.0 |
12.6% |
19.0% |
Normalised net income |
12.5 |
12.7 |
1.6% |
7.8% |
13.4 |
15.1 |
13.0% |
18.8% |
Normalised EPS (p) |
18.4 |
18.4 |
-0.1% |
3.0% |
19.3 |
20.0 |
3.4% |
8.8% |
Net (debt)/cash |
(43.1) |
(42.7) |
-1.1% |
12.0% |
(40.3) |
(41.4) |
2.8% |
-3.0% |
Net debt/annualised EBITDA |
1.9x |
1.7x |
1.7x |
1.6x |
Source: Edison Investment Research
Valuation
We tabulate below the operating and valuation metrics for Acal’s peer group. Excluding companies that have been bid for, the stock is currently trading at a discount of 34% for FY17e and 33% for FY18e on a P/E basis and 24% for FY17e and 29% for FY18e on an EV/EBITDA basis. The trading update, indicating unchanged expectations for the remainder of FY17, combined with further progress in the company’s strategy to grow the Design & Manufacturing side of the business provide confidence in both the near-term and longer-term outlook for the company. Continued growth in the proportion of revenue generated from design and manufacturing should support operating margin expansion, and should help to reduce the valuation discount.
Exhibit 3: Peer group valuation metrics
|
EV/sales (x) |
EV/EBITDA (x) |
P/E (x) |
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 |
0.7 |
0.6 |
0.6 |
10.2 |
8.9 |
7.7 |
13.1 |
12.7 |
11.7 |
3.5% |
3.6% |
3.6% |
Specialist distributors |
||||||||||||
Diploma |
3.0 |
2.6 |
2.5 |
16.2 |
14.5 |
13.8 |
24.2 |
21.7 |
20.7 |
1.8% |
2.2% |
2.3% |
Solid State |
0.9 |
0.9 |
0.9 |
8.0 |
11.1 |
11.4 |
8.6 |
12.9 |
12.2 |
2.7% |
2.8% |
2.9% |
High service & commodity distributors |
||||||||||||
Brammer* |
0.4 |
0.4 |
0.4 |
7.4 |
10.9 |
8.7 |
11.1 |
15.7 |
12.0 |
6.5% |
4.5% |
5.1% |
Electrocomponents |
1.8 |
1.6 |
1.5 |
21.0 |
15.5 |
14.0 |
39.2 |
26.0 |
22.9 |
2.4% |
2.4% |
2.5% |
Design & manufacturing |
||||||||||||
E2V* |
2.6 |
2.4 |
2.3 |
11.7 |
10.7 |
10.1 |
18.9 |
19.0 |
17.5 |
1.9% |
2.1% |
2.2% |
Gooch & Housego |
3.0 |
2.6 |
2.4 |
14.8 |
12.8 |
11.5 |
26.8 |
23.7 |
21.2 |
0.8% |
0.9% |
1.0% |
TT Electronics |
0.6 |
0.5 |
0.5 |
8.8 |
6.2 |
5.8 |
17.6 |
13.8 |
12.5 |
3.5% |
3.6% |
3.7% |
XP Power |
3.2 |
2.7 |
2.5 |
11.7 |
10.9 |
9.8 |
17.4 |
16.9 |
15.1 |
3.6% |
3.8% |
4.0% |
Average |
1.9 |
1.7 |
1.6 |
12.5 |
11.6 |
10.5 |
20.5 |
18.7 |
16.8 |
2.9% |
2.8% |
3.0% |
Average excluding bid for companies |
2.1 |
1.8 |
1.7 |
13.4 |
11.8 |
10.9 |
22.3 |
19.2 |
17.4 |
2.5% |
2.6% |
2.7% |
Source: Edison Investment Research, Bloomberg (as at 25 January). Note: *Subject to a takeover bid.
Exhibit 4: Peer group operating 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 |
32.2% |
33.0% |
33.0% |
6.9% |
7.0% |
7.4% |
5.9% |
6.1% |
6.5% |
6.1% |
13.3% |
8.4% |
Specialist distributors |
||||||||||||
Diploma |
35.9% |
36.5% |
36.5% |
18.3% |
18.2% |
18.3% |
17.2% |
15.9% |
16.1% |
14.6% |
12.8% |
4.1% |
Solid State |
31.8% |
28.1% |
28.2% |
11.6% |
8.4% |
8.5% |
10.2% |
7.4% |
7.7% |
20.6% |
-0.1% |
4.0% |
High service & commodity distributors |
||||||||||||
Brammer* |
30.9% |
30.0% |
30.7% |
6.0% |
4.0% |
4.8% |
4.7% |
2.1% |
3.0% |
-0.9% |
2.3% |
4.1% |
Electrocomponents |
43.5% |
43.8% |
43.9% |
8.6% |
10.3% |
10.8% |
6.4% |
8.4% |
9.1% |
2.0% |
13.8% |
5.0% |
Design & manufacturing |
||||||||||||
E2V* |
40.3% |
41.4% |
41.6% |
22.4% |
22.6% |
22.8% |
17.8% |
17.9% |
18.1% |
5.5% |
8.2% |
5.0% |
Gooch & Housego |
40.6% |
41.6% |
41.6% |
20.3% |
20.0% |
20.7% |
16.5% |
16.1% |
16.8% |
6.0% |
17.5% |
7.1% |
TT Electronics |
18.1% |
18.2% |
18.2% |
7.2% |
9.2% |
9.4% |
1.7% |
2.0% |
2.1% |
(2.7%) |
10.4% |
4.8% |
XP Power |
49.8% |
49.2% |
49.4% |
27.1% |
25.2% |
25.9% |
23.6% |
21.8% |
22.6% |
8.5% |
16.0% |
7.2% |
Average |
32.7% |
31.4% |
33.6% |
15.2% |
14.7% |
15.2% |
12.3% |
11.5% |
11.9% |
6.7% |
10.1% |
5.2% |
Average excluding bid for companies |
33.2% |
31.8% |
34.4% |
15.5% |
15.2% |
15.6% |
12.6% |
11.9% |
12.4% |
8.2% |
11.7% |
5.4% |
Source: Edison Investment Research, Bloomberg (as at 25 January). Note: *Subject to a takeover bid.
Exhibit 5: Financial summary
£m |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
177.4 |
211.6 |
271.1 |
287.7 |
326.0 |
353.3 |
Cost of Sales |
(123.0) |
(148.6) |
(186.7) |
(195.1) |
(218.5) |
(236.7) |
||
Gross Profit |
54.4 |
63.0 |
84.4 |
92.6 |
107.6 |
116.5 |
||
EBITDA |
|
|
7.4 |
9.1 |
16.6 |
19.8 |
22.7 |
26.2 |
Operating Profit (before am, SBP and except.) |
6.1 |
7.7 |
14.0 |
17.0 |
19.8 |
23.0 |
||
Operating Profit (before am. and except.) |
|
5.5 |
7.1 |
13.4 |
16.3 |
19.1 |
22.2 |
|
Amortisation of acquired intangibles |
(0.7) |
(1.0) |
(2.1) |
(2.8) |
(3.6) |
(3.6) |
||
Exceptionals |
(3.4) |
(0.9) |
(5.2) |
(2.1) |
(10.4) |
(3.5) |
||
Share-based payments |
(0.6) |
(0.6) |
(0.6) |
(0.7) |
(0.7) |
(0.8) |
||
Operating Profit |
1.4 |
5.2 |
6.1 |
11.4 |
5.1 |
15.1 |
||
Net Interest |
(0.5) |
(0.8) |
(1.6) |
(1.8) |
(3.0) |
(3.0) |
||
Profit Before Tax (norm) |
|
|
5.6 |
6.9 |
12.4 |
15.2 |
16.8 |
20.0 |
Profit Before Tax (FRS 3) |
|
|
0.7 |
4.2 |
4.3 |
9.4 |
1.9 |
11.9 |
Tax |
1.4 |
(0.5) |
(1.4) |
(2.2) |
(1.0) |
(3.1) |
||
Profit After Tax (norm) |
4.6 |
6.0 |
10.0 |
11.8 |
12.7 |
15.1 |
||
Profit After Tax (FRS 3) |
2.1 |
3.7 |
2.9 |
7.2 |
0.8 |
8.8 |
||
Average Number of Shares Outstanding (m) |
39.2 |
43.1 |
57.6 |
63.3 |
65.4 |
70.7 |
||
EPS - normalised & diluted (p) |
|
|
11.3 |
13.1 |
16.4 |
17.8 |
18.4 |
20.0 |
EPS - IFRS basic (p) |
|
|
(4.8) |
3.0 |
5.0 |
11.4 |
1.3 |
12.4 |
EPS - IFRS diluted (p) |
|
|
(4.7) |
2.8 |
4.8 |
10.9 |
1.2 |
11.6 |
Dividend per share (p) |
6.2 |
6.8 |
7.6 |
8.1 |
8.4 |
8.5 |
||
Gross Margin (%) |
30.7 |
29.8 |
31.1 |
32.2 |
33.0 |
33.0 |
||
EBITDA Margin (%) |
4.2 |
4.3 |
6.1 |
6.9 |
7.0 |
7.4 |
||
Operating Margin (before am, SBP and except.) (%) |
3.4 |
3.6 |
5.2 |
5.9 |
6.1 |
6.5 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
30.9 |
33.1 |
88.6 |
108.4 |
116.4 |
112.7 |
Intangible Assets |
24.2 |
25.5 |
69.9 |
88.2 |
96.5 |
92.8 |
||
Tangible Assets |
3.1 |
3.5 |
13.8 |
14.7 |
14.4 |
14.4 |
||
Deferred tax assets |
3.6 |
4.1 |
4.9 |
5.5 |
5.5 |
5.5 |
||
Current Assets |
|
|
81.8 |
92.7 |
127.3 |
128.3 |
134.1 |
145.3 |
Stocks |
19.3 |
19.4 |
39.8 |
42.9 |
46.4 |
50.3 |
||
Debtors |
44.7 |
48.3 |
60.2 |
65.5 |
72.3 |
78.4 |
||
Cash |
17.8 |
18.1 |
26.7 |
19.9 |
15.3 |
16.6 |
||
Current Liabilities |
|
|
(50.9) |
(58.3) |
(62.1) |
(61.7) |
(75.5) |
(87.4) |
Creditors |
(46.6) |
(51.5) |
(61.9) |
(60.9) |
(69.7) |
(76.6) |
||
Short term borrowings |
(4.3) |
(6.8) |
(0.2) |
(0.8) |
(5.8) |
(10.8) |
||
Long Term Liabilities |
|
|
(10.3) |
(19.0) |
(61.1) |
(73.1) |
(68.1) |
(63.1) |
Long term borrowings |
(1.7) |
(9.5) |
(45.5) |
(57.2) |
(52.2) |
(47.2) |
||
Other long term liabilities |
(8.6) |
(9.5) |
(15.6) |
(15.9) |
(15.9) |
(15.9) |
||
Net Assets |
|
|
51.5 |
48.5 |
92.7 |
101.9 |
106.9 |
107.5 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
5.7 |
6.1 |
6.6 |
14.6 |
11.1 |
20.1 |
Net Interest |
(0.6) |
(0.8) |
(1.6) |
(1.8) |
(3.0) |
(3.0) |
||
Tax |
(1.4) |
(0.9) |
(3.3) |
(4.3) |
(3.0) |
(5.3) |
||
Capex |
(1.3) |
(1.4) |
(2.5) |
(2.3) |
(2.5) |
(3.1) |
||
Acquisitions/disposals |
(0.5) |
(9.2) |
(37.3) |
(19.8) |
(15.2) |
(1.5) |
||
Financing |
5.7 |
0.1 |
52.7 |
0.0 |
13.6 |
0.0 |
||
Dividends |
(2.3) |
(2.7) |
(3.6) |
(4.9) |
(5.5) |
(5.9) |
||
Net Cash Flow |
5.3 |
(8.8) |
11.0 |
(18.5) |
(4.6) |
1.3 |
||
Opening net cash/(debt) |
|
|
6.3 |
11.8 |
1.8 |
(19.0) |
(38.1) |
(42.7) |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.2 |
(1.2) |
(31.8) |
(0.6) |
0.0 |
0.0 |
||
Closing net cash/(debt) |
|
|
11.8 |
1.8 |
(19.0) |
(38.1) |
(42.7) |
(41.4) |
Source: Acal, Edison Investment Research
|
|
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