Judges Scientific reported results for the first half of 2018. The period included a first-time contribution from Oxford Cryosystems, which was acquired in July 2017. Organic growth of order intake and sales was solid and well in line with the full year target.
HEALTHY ORDER BOOK MOMENTUM CONTINUES
Judges Scientific (LON:JDG) reported a 13% year-on-year (Y/Y) increase in revenues for the first half (1H) of 2018 to a record high of £37.0mln with an organic growth rate of 5.7% and a maiden contribution from Oxford Cryosystems, which was acquired in July 2017. Sales were especially strong in the Rest of Europe (up 47% Y/Y with organic growth of 31%) and North America (up 23% with organic growth of 16%). The UK posted positive growth of 13%, improving from last year, while the Rest of the World’s sales decreased 14% Y/Y. Sales in China/Hong Kong decreased 17% after years of strong growth in the past; however, the management believes the slower growth is a blip and not a result of changes in demand. The solid order book from the beginning of 2018 continued the momentum; organic order intake increased by 2.3% and the order book stood at 15.0 weeks or 14.6 weeks including Oxford Cryosystems.
FULL-YEAR EARNINGS WELL ON TRACK TO EXCEED MARKET EXPECTATIONS
The group’s adjusted operating profit grew 48% Y/Y to £6.9mln; the vacuum segment’s performance was noteworthy, with a significant increase of 26% and 89% for revenue and operating profit respectively lifting the segment’s adjusted operating margin to 23% from 15% in 1H 2017. Such a notable profit increase was thanks to a continued operational improvement, the new earnings contribution from Oxford Cryosystems, and an increased shareholding at Bordeaux.
Sterling’s weakness has been a tailwind for Judges since 2016 and continued to benefit the earnings during the first half of 2018 as well. The group’s adjusted earnings per share (EPS) were up 52% Y/Y and the management announced an interim dividend for 2018 of 12.0p – a 20% increase Y/Y. While the earnings growth may slow down in the second half (2H) of 2018 due to tougher comparatives, the management is confident the company will outperform the market expectation for the full year earnings based not only on the solid order book trend but also a favourable tax rate of c. 15% for 2018.
OUTLOOK AND VALUATIONS REMAIN ATTRACTIVE
Although not immune to the volatility of demand, Judges has a proven track record of running a resilient business as well as managing an excellent shareholder policy. The group’s return on total invested capital recovered to 24% for 12 months to the end of June 2018 from 17% the previous year. The interim dividend for 2018 was hiked 20%, roughly in line with the group’s 10-year average compound annual dividend growth rate of 25%. The management believes the positive long-term industry outlook is intact despite near-term macro uncertainties and the group’s focus on the micro-niche market should propel the solid growth of the business. We have revised our full-year 2018 (FY2018) earnings estimates to incorporate the margin improvement and favourable tax rate; the revised estimated is for adjusted basic EPS of 153p vs. the previous estimate of 139p. Our discounted cash flow and dividend discount model-derived fair value per share ranges from 3,180p to 3,310p, implying 15-20% upside from the current share price.