1H 2017 INTERIM RESULTS
■ Strong demand recovery continued since June 2016
Judges Scientific Plc (LON:JDG) revenues were up 20% to record high £32.7mn for 1H 2017 (14% organic growth) with adj. operating profit increasing 48% to $4.4mn. Organic sales growth was seen across the region except UK with the biggest growth coming from China/Hong Kong (up 40%). Given most of subsidiaries’ business are international, the management expects healthy demand growth from China and relatively stable growth in EU/US to continue regardless of dampened growth in UK post Brexit. The group’s total order intake saw the same geographical pattern with China/Hong Kong posting the strongest growth of 85% Y/Y for the 1H 2017. The organic order book has improved from 11.2 weeks in June 2016 to 14.9 weeks in January 2017 and 16.5 weeks as of 2H 2017. Demand issues at two subsidiaries in 2016 have receded and management are progressing with resolving the production problems at a third business. As a result, the company’s 12M-trailing ROTIC has improved to 17.4% from 15.2% at the end of 2016.
■ New acquisition: Oxford Cryosystems
During 1H 2017, Judges Scientific Plc (LON:JDG) acquired Oxford Cryosystems, a manufacturer of cryogenic cooling systems used for X-Ray crystallography and other applications. Oxford Cryosystems' products are sold to original equipment manufacturers (OEM) for integration into X-ray Diffraction systems or to users in university research laboratories. While the acquisition is immediately earnings accretive, the acquisition is not a near term growth driver and is no different from Judges’ core strategy of long-term buy and build.
■ Solid dividend growth continues along with prudent debt management
Judges announced interim dividend of 10.0p (vs. 9.0p in 2016), which is well in line with the company’s dividend policy and its historical track record. The management reaffirmed that enhancing shareholder return is its priority as long as the business continues scaling up both organically and through acquisitions, hence c.10% p.a. dividend growth in the near term appears realistic in our view. Overall cash flow has improved during the period, and the company successfully lowered the adj. net debt to £5.8mn from £9.9mn at the beginning of the year bringing net debt/ adj. EBITA ratio to below 1x or close to historical average of around 0.5x.
■ Valuation suggests more upside
Reflecting positive 1H 2017 results, we slightly revised up our earnings. We now expect the topline to grow 16% Y/Y to £66.5mn for 2017 with adj. operating margin improving to 14.3% and adj. basic EPS increasing to 105.8p (vs. 84.8p in 2016). Our DCF (assuming 10-year sales CAGR 7%, Gross cash flow CAGR 8% and perpetual growth rate 2%) and DDM (assuming 10% dividend growth for next 5 years and 7.7% for perpetuity) derived fair values imply upside of c.25-30% from current price. Judges shares are currently trading at P/S of 1.9x/1.7x and P/E of 19.1x/15.6x on 2017/2018 adjusted earnings.Full report is available via Capital Network website