Acal's (LON:ACL) acquisition last month of cable and connector specialist Contour, immediately earnings enhancing, underlined its progress in building a leading provider of electronics to industry.
The £17mln purchase means Acal has now made more than 10 acquisitions since it listed in 2009 and, at the end of last year, the group said it had £35mln in the tank for future deals.
Acal designs and makes specific electric parts for thousands of industrial manufacturers. One example - temparature sensors in coffee machines.
It supplies its technology into industrial and medical applications, aerospace, transport and also now the Internet of Things (IoT).
Demand in such spaces is a "long term trend", which will continue, reckons chief executive Nick Jefferies.
"It's a very good, stable, long term market place to be in," he told Proactive.
Broker FinnCap agreed.
It says the Contour acquisition will lead to higher group operating margins and more than double Acal’s capability in this technology area, namely cabling and connectors.
Analyst Guy Hewett notes that Contour reported sales of £10.7mln and underlying profits of 1.8mln in the year to June 2015.
Operating margins were 16.8%, compared to Acal’s group operating margin of 5.4% in the first half of the 2016 year, he said.
Chief executive Jefferies told Proactive that he felt Contour, which the company has known for some time, made a "good fit" with Acal and particularly, gave it more access to medical markets.
The firm has agreed a business plan with the Contour directors for the next three years, involving certain targets and he expects Contour pre-tax profit to continue to grow
FinnCap notes: "Acal is paying an initial £14m cash and £3m in shares. There is also £1m deferred consideration and £6m contingent consideration (due after April 2019). The significant contingent consideration suggests to us that there is strong growth potential ahead of our forecasts."
On Acal as a whole, the broker is bullish. It expects adjusted pre-tax profit of £14.4mln in 2016 rising to $17.6mln in 2017 on sales of £297.2 mln rising to £226.2mln in 2017.
It forecasts 13% average EPS (earnings per share) growth per year over the next three forecast years, meaning it continues to believe the valuation metrics are attractive.
The broker rates the shares a 'buy' targeting 339p - a good distance from the current price of 260p.
Analyst Hewett highlights the Contour purchase shows Acal's strategy of building a differentiated business with higher operating margins.
"This is being achieved both organically and by acquisition and, supported by the proliferation of technology and clients’ increasing need for Acal’s technology-based services, we believe that Acal is set to generate significant value."
Acal makes and distributes customised electronic products to around 25,000 industrial customers and in November last year, releasing first half numbers, said it remained on track to hit full-year expectations.
It reported revenue for the six months to September 30 of around £142.2mln, with underlying earnings (EBITDA) of £7.7mln and upped its dividend 6% to 2.33p, meaning since 2010 it has hiked its pay-outs by some 49%.
"As a result of the strategy we have been pursuing since 2009, Acal continues to move up the value chain," the firm said.
“We have now acquired 10 companies since 2009 and are very pleased with all of the acquisitions that we have made.
“We have a pipeline of about half a dozen acquisitions that we are looking at and we hope within the next two years there will be a fairly substantial one as well."
The company made two purchases in 2015, Norway-based Foss, and Danish firm Flux AS.
It added that it had “several value-enhancing acquisition opportunities in the pipeline” and the resources to fund them.