Acal — Update 16 February 2016

discoverIE Group (LSE: DSCV)

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Research: TMT

Acal — Update 16 February 2016

Acal

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Acal

North American acquisition

Trading update & acquisition

Industrial support services

17 February 2016

Price

248.0p

Market cap

£156m

£/US$1.45

Net debt (£m) at end H116

21.9

Shares in issue

63.0m

Free float

99%

Code

ACL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.4)

(11.4)

(1.6)

Rel (local)

(11.6)

(6.6)

13.2

52-week high/low

325.75p

240.00p

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 event

Trading update

April 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 reports that trading in the four months to 31 January 2016 has continued in a similar vein to H116, with a strong performance from the Design & Manufacturing (D&M) business partly offset by continued weakness in UK Custom Distribution. The company has made its first direct acquisition in North America for £2m, expanding its magnetics capability and providing scope for further cross-selling. With management expectations for FY16 earnings unchanged, we maintain our forecasts.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

211.6

6.9

13.1

6.80

18.9

2.7

03/15

271.1

12.4

16.4

7.60

15.1

3.1

03/16e

294.9

14.5

16.5

7.98

15.0

3.2

03/17e

317.9

16.7

18.4

8.30

13.5

3.3

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

On track to meet FY16 earnings expectations

For the four months ended 31 January, Acal saw constant currency growth of 26% for its D&M business, with underlying growth similar to the 4% experienced in H116. Custom Distribution saw flat ongoing sales (ie excluding large one-off sales in H215 and sales of discontinued non-specialist product), with the unchanged trend of a stronger continental Europe and weaker UK. Recent acquisitions (Flux, Contour Electronics) are performing as expected. Gross margin remains firm and management maintains its earnings forecast for FY16.

Acquisition of Canadian magnetics company

Acal has acquired Plitron Manufacturing Inc, a Canadian designer and manufacturer of custom toroidal transformers, paying C$4m/£2m on a debt-free/cash-free basis using existing debt facilities. Plitron has a Canadian and US customer base and in the 12 months ended 31 May 2015 generated revenues of C$8.2/£4.0m. While Acal already has some presence in the US, this is the company’s first direct acquisition in North America. We view this deal as a sensible way for Acal to test out the North American market in a product area that is complementary to its existing magnetic expertise.

Valuation: Growing proportion of D&M drives upside

The stock is trading on a P/E of 15.0x FY16e and 13.5x FY17e, at a discount to its peer group. Acal continues to make good progress in its strategy to move up the value chain and, in the medium term, as it 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 more than 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

11.1

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

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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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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