Acal — Stronger trading drives upgrades

discoverIE Group (LSE: DSCV)

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Research: TMT

Acal — Stronger trading drives upgrades

Acal experienced strong trading in Q417, with organic growth in both divisions further boosted by currency. Order intake in Q417 saw 13% organic growth, positioning the company well for FY18. We have revised our forecasts to reflect the stronger trading environment, resulting in EPS upgrades of 3.4% in FY17 and 2.3% in FY18. Despite some recovery in the share price, in our view the stock still represents good value.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Acal

Stronger trading drives upgrades

Trading update

Industrial support services

24 April 2017

Price

250.00p

Market cap

£177m

€1.193: NOK10.96: £1

Net debt (£m) at end Q317

41.1

Shares in issue

70.7m

Free float

96%

Code

ACL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.6

7.3

(5.6)

Rel (local)

17.5

7.0

(15.8)

52-week high/low

280. 0p

204.5p

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

FY17 results

6 June 2017

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 experienced strong trading in Q417, with organic growth in both divisions further boosted by currency. Order intake in Q417 saw 13% organic growth, positioning the company well for FY18. We have revised our forecasts to reflect the stronger trading environment, resulting in EPS upgrades of 3.4% in FY17 and 2.3% in FY18. Despite some recovery in the share price, in our view the stock still represents good value.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

211.6

6.9

13.1

6.8

19.1

2.7

03/15

271.1

12.4

16.4

7.6

15.2

3.0

03/16

287.7

15.2

17.8

8.1

14.0

3.2

03/17e

335.8

17.4

19.0

8.4

13.2

3.4

03/18e

364.3

20.3

20.3

8.5

12.3

3.4

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

Strong uptick in Q4 trading

Management had always expected a pick-up in trading in Q4, but actual results were better than expected, helped by recent restructuring and a better market environment, and management now anticipates FY17 results slightly ahead of their expectations. In Q417, Acal saw 15% constant currency revenue growth and 11% constant currency organic growth (Design & Manufacturing 8%, Custom Distribution 14%). H217 revenues grew 11% in constant currency and 6% organic. Order intake growth accelerated to 16% constant currency and 13% organic, from 4% organic growth in Q317, with similar growth in both divisions. Acal reduced net debt significantly, with net debt/EBITDA (annualised for acquisitions) falling from 1.9x at the end of Q317 to below 1.5x at the end of FY17. The Variohm acquisition (Jan 2017) is performing well and has already generated its first cross-selling deal.

Estimates upgraded; further M&A likely

We have revised our forecasts to take account of stronger revenue growth in H217, resulting in a 3.0% upgrade to our FY17 revenue forecast and 3.1% to FY18. This flows through to higher operating profit in both years, resulting in a 3.4% upgrade to FY17 normalised EPS and 2.3% to FY18. We have also revised down our net debt forecasts and expect net debt/EBITDA to fall to 1.3x by end FY18. With the recent hiring of an M&A director, we expect to see more bolt-on acquisitions to strengthen the D&M business, which should boost earnings growth.

Valuation: D&M progress to drive upside

Despite a 17% pick-up from the recent low of 211.5p, the stock continues to trade at a c 30% discount to the peer group average on EV/EBITDA and P/E multiples. The positive trading update combined with good 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 also supported by a dividend yield above 3%.

Exhibit 1: 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

335.8

364.3

Cost of Sales

(123.0)

(148.6)

(186.7)

(195.1)

(225.0)

(244.1)

Gross Profit

54.4

63.0

84.4

92.6

110.8

120.2

EBITDA

 

 

7.4

9.1

16.6

19.8

23.1

26.5

Operating Profit (before am, SBP and except.)

 

6.1

7.7

14.0

17.0

20.2

23.3

Operating Profit (before am. and except.)

 

5.5

7.1

13.4

16.3

19.5

22.5

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

5.5

15.4

Net Interest

(0.5)

(0.8)

(1.6)

(1.8)

(2.8)

(3.0)

Profit Before Tax (norm)

 

 

5.6

6.9

12.4

15.2

17.4

20.3

Profit Before Tax (FRS 3)

 

 

0.7

4.2

4.3

9.4

2.5

12.2

Tax

1.4

(0.5)

(1.4)

(2.2)

(1.4)

(3.2)

Profit After Tax (norm)

4.6

6.0

10.0

11.8

13.2

15.4

Profit After Tax (FRS 3)

2.1

3.7

2.9

7.2

1.1

9.0

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

19.0

20.3

EPS - IFRS basic (p)

 

 

(4.8)

3.0

5.0

11.4

1.7

12.8

EPS - IFRS diluted (p)

 

 

(4.7)

2.8

4.8

10.9

1.6

11.9

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

6.9

7.3

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

3.4

3.6

5.2

5.9

6.0

6.4

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

138.6

150.3

Stocks

19.3

19.4

39.8

42.9

47.8

51.9

Debtors

44.7

48.3

60.2

65.5

69.5

75.4

Cash

17.8

18.1

26.7

19.9

21.3

23.0

Current Liabilities

 

 

(50.9)

(58.3)

(62.1)

(61.7)

(77.5)

(89.7)

Creditors

(46.6)

(51.5)

(61.9)

(60.9)

(71.7)

(78.9)

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

109.4

110.2

CASH FLOW

Operating Cash Flow

 

 

5.7

6.1

6.6

14.6

17.0

20.7

Net Interest

(0.6)

(0.8)

(1.6)

(1.8)

(2.8)

(3.0)

Tax

(1.4)

(0.9)

(3.3)

(4.3)

(3.2)

(5.4)

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)

1.4

1.8

Opening net cash/(debt)

 

 

6.3

11.8

1.8

(19.0)

(38.1)

(36.7)

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)

(36.7)

(35.0)

Source: Acal, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Acal and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Acal and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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