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Buy into Acal's transformation

A strategy designed to extract maximum profit from rising demand for electronics may transform Acal from a run-of-the-mill distributor of commodity products into a specialist manufacturer.
November 5, 2015

Acal (ACL) is hardly a household name. But it supplies the electronic components to a long list of gadgets and products that are - from De'Longhi coffee machines to Stannah stairlifts. A savvy strategy designed to extract maximum profit from rising demand for electronics in everyday applications has ensured that business at the components specialist is booming. But encouraging trading is no longer reflected in the share price, as concerns about the shape of the global economy have pushed the company's share rating down to 15 times the current year's forecast earnings - a level where the shares are a buy.

IC TIP: Buy at 243p
Tip style
Speculative
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Switch from being a distributor to a manufacturer
  • Potential to widen profit margins
  • Taps into rising demand for electronics in everyday applications
  • Potential from huge customer base
Bear points
  • Sluggish global economic growth
  • Effect of the weak euro

True, management recently warned that the economic slowdown could be an issue. But fortunately Acal's core market is Europe, where there is a recovery of sorts. Strip out the debilitating weakness of the euro and sales grew 30 per cent in the six months to September, helping to propel Acal's operating profit margin above 5 per cent.

Indeed, profits have been rising ever since chief executive Nick Jefferies implemented a plan to transform Acal from a run-of-the-mill distributor of electronic bits and pieces into a designer, manufacturer and supplier of customer-specific components. This has been achieved by selling off the company's low-margin legacy businesses, while acquiring companies that strengthen its manufacturing capabilities.

 

 

The recent acquisitions of Foss, which supplies the fibre-optic market, and Noratel, a maker of components for offshore wind turbines, have more than doubled the proportion of sales generated from products that Acal designs or makes itself to 46 per cent. In the year to March 2015 that line of business pulled in operating margins of 11.3 per cent, versus the 3.9 per cent margin generated from the distribution arm. Given that management's mid-term target is to make 65 per cent of sales from designing and manufacturing, the scope to widen margins further in the coming years is huge.

If Noratel's and Foss's early progress is anything to go by that aim is feasible. Combined they contributed about £59m of revenue and £6m of underlying operating profit in the year to March 2015. Other acquisitions are reportedly in the pipeline, although adequate access to debt funding suggests Acal won't need a repeat of last year's rights issue.

New arrivals also benefit from gaining access to a much wider range of customers. This results from a special legacy of the distribution operation - a network of 20,000 customers spread across the globe as a platform to sell manufactured products. Cross-selling, coupled with web marketing customer wins and synergies from acquisitions, generated £5.5m of new business in the year to March 2015.

ACAL (ACL)
ORD PRICE:243pMARKET VALUE:£153m
TOUCH:240-243p12-MONTH HIGH:335pLOW: 192p
FORWARD DIVIDEND YIELD:3.2%FORWARD PE RATIO:14
NET ASSET VALUE:147p*NET DEBT:20%

Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131775.09.86.2
20142126.311.86.8
201527111.815.47.6
2016†29614.716.67.7
2017†30916.218.48.0
% change+4+10+11+4

Normal market size: 1,000

Matched bargain trading

Beta: 0.3

*Includes intangible assets of £69.9m, or 111p a share

†Peel Hunt forecasts (profits and EPS underlying figures)