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Acal Plc: THE INVESTMENT CASE

Electronics group Acal to beat expectations after strong finish to the year

A combination of factors meant trading in the second half was stronger than had been anticipated
electronics motherboard
INVESTMENT OVERVIEW: ACL The Big Picture
Second half revenues were 11% higher than those posted in the same period last year

Electronics manufacturer Acal Plc (LON:ACL) expects full-year results to come in slightly ahead of expectations following a strong performance towards the end of the year.

A combination of market share gains, better routes to market and greater confidence among its core customer base meant final quarter revenues were 15% ahead of last year at constant exchange rates.

The underlying performance was strong too: the Design & Manufacturing division grew revenues by 8% in the final quarter, while the Customer Distribution business saw revenues rise 14% year-on-year.

Total revenues for the six months ended March 31 came in 11% higher at constant exchange rates compared with the same period last year.

Importantly, the number of orders towards the end of last year ramped up, which means the group’s forward order book has grown to a record year end high.

WATCH: Acal boss ‘very pleased’ with strong fourth quarter performance

M&A activity

Earlier this year, Acal agreed to buy out UK-based components manufacturers Variohm Holdings Limited in a deal which could be worth up to £13.85mln.

Acal paid £12mln upfront, with a further £1.85mln payable should the new addition achieve certain growth targets and conditions.

READ MORE: Acal agrees acquisition of Variohm…

The acquisition is ‘highly complementary’ said Acal, adding that it represents a step in its strategy to grow its design and manufacturing division with differentiated niche and customised electronic components.

In its last full year, Variohm generated £19.4mln of revenue and reported a £1.6mln pre-tax profit and is expected to be earnings enhancing in its full year (the twelve months ending March 2018).

Given that is currently “performing well”, it would seem Acal is still confident with that target.

The company isn’t resting on its laurels and has made it very clear it will target other acquisitions that it feels can add value for shareholders.

In fact, Acal created a new role of M&A director in March, to which it appointed Jeremy Morcom.

Acal created the new position as it looks to push ahead with its well established strategy of acquiring “high quality, complementary” businesses to grow its design and manufacturing division. Watch this space…

Money, money, money…

With a lot of smaller cap stocks, cash is often in short supply although this isn’t an issue for Acal at the minute.

The firm raised £14.1mln back in January to help fund the acquisition of Variohm after it sold 6.4mln new shares at 220p each.

READ MORE: Acal successfully completes £14.1mln placing

A sizeable chunk of this, £12mln to be precise, went straight to Variohm for the intial payment, but Acal revealed in its recent trading update that cash generation had been strong in the second half of its financial year.

In fact it’s been so strong that, since the turn of the year, the company has reduced its gearing ratio below 1.5 times, from 1.9 times at 31 December.

Room for growth

The shares shot up by 10% following the upbeat trading statement changing hands for 260p. That gives the company a market capitalisation of just over £181mln.

READ MORE: Acal among Peel Hunt’s top value plays for 2017

Reiterating its ‘buy’ recommendation, City broker finnCap said the shares are worth 339p each.

“Acal’s true potential value lies in taking advantage of the digital transformation of industry,” said analyst Guy Hewett.

“With its growing expertise in power supplies, fibre optics, wireless and sensors (amongst others) and its design to delivery services, Acal is very well placed to produce significant long-term growth.”

He sees revenues growing to £329mln for the year just gone, before rising to £353mln (2018) and £361mln (2019), giving adjusted operating profits respectively of £23mln, £28.4mln and £30.7mln.



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CN Research
January 10 2017

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