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Stadium Group hits the tipping point

The design-led technology arm has overtaken the group's low-margin electronic manufacturing service (EMS) activities for the first time.
Stadium Group hits the tipping point
The company is at the forefront of the machine-to-machine revolution.

“We are at a tipping point,” says Charlie Peppiatt, chief executive of Stadium Group PLC, as he runs through the latest results presentation.

He is referring to the way the business has developed in the last three years under his stewardship.

The design-led technology arm has overtaken the group's low-margin electronic manufacturing service (EMS) activities for the first time. 

The prelims revealed the technology operation, which focuses on specialist power supply units and wireless systems used for machine to machine (M2M) communications, is responsible for just over 50% of sales and, crucially, 70% of Stadium’s profit.

“We have transitioned to become a modern, agile, design-led tech business focused on some clearly identified growth sectors and moved away from being a generalist,” says Peppiatt.

And this is a good thing. EMS is a highly competitive volume business, where suppliers are “battered down on price”. Only those with significant scale make a decent fist of it. 

Scale in EMS means turnover of hundreds of millions a year, not tens of millions.

The transformation into a technology-led company has been enacted via a combination of self-help and a trio of well-judged acquisitions.

The former first: Stadium has become operationally more streamlined, setting up manufacturing centres of excellence and is becoming logistically savvy.

Where businesses tended to operate independently, which meant there was overlap and duplication, the company is largely managed centrally.

Stadium has also invested in design centres where engineers are able to extol the virtues of the latest piece of tech to fellow engineers at customer companies.

“When you are selling a technology solution you don’t put people in cars driving round the country talking to purchasing staff at companies,” says CEO Peppiatt of the successful design centre concept. 

“It is about engineers and technical people talking with other engineers. 

“That way you get [your technology] designed into products. In the tech space these centres are found in hotspots or clusters in various parts of world. 

“They help you establish your reputation and gain mind-share with the different stakeholders involved.”

One of those hotspots is Zhangjiang Hi-Tech  Park in Shanghai, the site of the latest Stadium Group design centre. Europe will be the location for the next hub, the CEO adds.

Acquisitions have been key to the evolution of Stadium too. It has made three in three years: IGT Industries, United Wireless and Stontronics.

The latest deal, the £6.5mln purchase of Stontronics, was funded from a £6mln placing and open offer that was very well supported by investors.

Will Stadium look at further deals? 

“We remain open to acquisitions,” Peppiatt says. 

"We are very clear that it needs to be a catalyst and an accelerator to the business. We might look at something slightly bigger next time around.”

The share price in the last 12 months has advanced around 5%, which values the business at £46mln, or 11 times forward earnings.

What this means is the current share prices gives little or no credit for the transformation enacted in the last three years; one that has boosted operating profit margins to 8.5% from 4.2%. 

Analysts reckon the Stadium team can get those margins into double digits in the next couple of years.

The loss of a "significant" client recently has only dented the Stadium Group juggernaut, not written it off completely.

“We are clearly disappointed to lose a significant wireless customer during the period and there's no doubt that this sets us back temporarily in terms of our ambitions for growth,” said Peppiatt.

“However…we are confident that we now have the teams in place to drive the significant growth expected in 2017 and beyond.”

From the broker's perspective, too, the loss of one client doesn't materially change the outlook for the business.

N+1 Singer still suggests that pre-tax profits will grow nearly 10% in 2016 to £4.3mln, and then to £5.8mln in 2017.

"We remain supportive of the group's strategy and continue to see a bright future," the broker added.

So, what’s a reasonable rating for a hybrid business such as Stadium, which also makes a fairly decent dividend payment?

The technology arm, if listed separately, could expect to be valued at 18-19 times earnings, so a figure of 14 to 15 times earnings per share (EPS) probably fully values Stadium, analysts reckon.

As N+1 reckons the current share price is “much too low for a rapidly growing group which, we believe, is at an inflection point in its history”. 

Peppiatt has a different take. “We are conscious that we have to continue to deliver; build up a track record. Eventually we will be rewarded for this.”

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