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Cheap e2v ready for lift off

A change of culture at e2v could enable the manufacturer of high-tech electronic components to finally fulfil its potential.
December 4, 2014

After failing to grow sales over the five years that followed the credit crunch, e2v (E2V) returned to growth in 2014 and the niche electronics company's new chief executive, Steve Blair, has a plan to keep sales and profits moving forward. But despite tangible signs of progress and a target to double operating profit by 2020, e2v's shares still trade at a paltry rating compared with peers.

IC TIP: Buy at 170p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Commercial focus expected to double operating profit by 2020
  • Balance sheet strength provides headroom for further acquisitions
  • High barriers to entry
  • Exposed to structural growth trends
  • Trades at a discount to peers
Bear points
  • Exposed to the economic cycle
  • US defence budget uncertainty

The Chelmsford-based manufacturer of radio frequency and microwave components came to market in 2004 after being spun out of Marconi two years earlier. While revenues have stagnated, the group has been through a period of cost-cutting and overseas expansion. Under new boss Mr Blair, who joined from Spectris (SXS) in March, the company plans to remove the shackles of its conglomerate past with its 'bringing life to technology' programme, which centres on customer responsiveness, innovation and operational excellence.

 

 

This may sound like glib corporate speak, but e2v serves some genuinely exciting end markets from which it should be able to generate growing sales. The company also has a recent track record of improving margins, which management plans to build on. And the strong balance sheet will be brought into play as one-third of the growth implied by the plan to double profit by 2020 is expected to come from acquisitions. To this end, the company purchased an imaging sensors business, AnaFocus, in September. Further deals should be underpinned by strong cash generation. Broker Liberum forecasts that e2v should produce free cash flow equivalent to roughly a fifth of its market capitalisation in the three years to 2017, providing between £60m and £80m for dealmaking.

On the organic growth side of the equation, e2v should also benefit from its focus on niche markets and the barriers to entry created by its high levels of research and development. This is reflected in the operating margins boasted by e2v's three divisions, which range from the mid-teens to low 20s, and a healthy £138m 12-month order book at the end of September, up from £130m a year earlier.

All of e2v's divisions have promise. The RF power division, which manufactures radio frequency and microwave components and accounted for 38 per cent of last year's sales, is exposed to the exciting radar systems and radiotherapy equipment markets. Civil aerospace demand for radar is being buoyed by growing air traffic, while ageing populations and the adoption of unhealthy western lifestyles in developing countries is boosting radiotherapy demand.

Meanwhile, e2v's imaging business, which accounts for 37 per cent of sales and recently provided imaging sensors for the European Space Agency's Rosetta spacecraft, looks set to benefit from increasing demand for earth monitoring. Orders continue to stack up as demand for the monitoring of climate change, natural resources and security reaches new heights. In March the European Parliament approved the new earth observation programme with a budget of €4.3bn (£3.4bn), while Euroconsult estimates that 42 countries will launch their first earth observation satellites by 2022.

E2v's semiconductor division could face a tougher ride, particularly as two-thirds of its revenue come from US defence spending, which is currently being squeezed. That said, electronic warfare is receiving a growing proportion of the shrinking amount of funding available. And while any global economic slowdown can be expected to hurt the company, e2v does boast a good geographic spread with 35 per cent of sales from the US, 29 per cent from Europe excluding the UK, 19 per cent from Asia and 15 per cent from the UK.

E2V TECHNOLOGIES (E2V)
ORD PRICE:170pMARKET VALUE:£370m
TOUCH:171-173p12-MONTH HIGH:175pLOW: 146p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:14
NET ASSET VALUE:74p*NET DEBT:£8.5m

Year to 31 MarTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201222038.611.34.1
201319730.813.44.1
201421833.611.14.2
2015**22934.911.74.3
2016**24538.812.14.9
% change+7+11+3+12

Normal market size: 1,500

Matched bargain trading

Beta: 0.45

*Includes intangible assets of £99m, or 45p a share

**Liberum forecasts, adjusted PTP and EPS figures